Ocado share price has skyrocketed by more than 66% in the past quarter, becoming the best-performing stock in the FTSE 100. It has gained by more than 70% in the past year, which makes it the third best-performing stock in the index after Flutter Entertainment and Avast, which have gained by more than 93% and 77%. So, do these gains make Ocado stock price a buy going forward?
Ocado Share Performance vs FTSE 100
Why Ocado stock price has outperformed
To answer this question, we need to ask ourselves why Ocado share price has been such a performer in the past quarter. There are several reasons for this.
First, online retail has thrived during the pandemic as more people shop online. In the United Kingdom, recent data from Nielsen showed that online sales have grown by double digits in the past few months. This growth was obvious with more people staying at home.
Second, the company’s first quarter earnings were better than expected. The company reported more than £441 million in revenue, representing a 10% year on year growth. In the same quarter in 2019, the firm had a revenue of more than £399 million.
This growth was due to an increase of average orders per week and order sizes. The average orders per week increased from the previous £311,000 to £343,000. Similarly, average order size increased from the previous £109 to £110. This growth was partly due to its joint venture with Marks and Spencer and its relationship with Kroger in the United States.
Third, the company managed to raise more than $1 billion from investors by selling a small amount of equity. This capital raising was opportunistic because of the share price performance.
So, is Ocado share price a buy going forward?
With all the good news, it is time to reflect on whether Ocado share price is a good buy for now. I believe it is based on the firm’s market share of grocery e-commerce in the UK and the recent expansion in the United States. While the share price is not cheap, all successful peers around the world are not cheap either. For example, a company like Amazon has a PE multiple of more than 80, which is relatively ambitious.
Also, I am aware of Ocado’s track record of weak profits. Indeed, it has generated less than £150 million of profits in the past decade. While some criticize this, I believe it is a good thing considering that the company is investing for growth. Building all those fulfilment centers does not come cheap.
However, the main challenge for Ocado is whether people will continue buying online as much as they were doing during the lockdown. To be fair, it is difficult to answer this but my bet is that it is. See, the lockdown introduced many people to shop online. The same trend will likely continue, albeit at a slower rate after the economy normalises.
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Ocado stock price technical analysis
Ocado share price is trading at £2,035, which is closer to the upper limit of the channel I talked about a while back. The price is in the fifth consecutive days of gains. Also, it is above the 50-day and 100-day exponential moving averages and slightly above the 78.6% Fibonacci retracement level. As such, a break above the upper side of this channel at £2072 will be the start of a new rally as bulls attempt to test the next resistance above £2,100.
On the flip side, a move below the support at £1913 will invalidate this thesis.