Down 59%, is this FTSE 100 dropout an unmissable bargain?

Ocado (LSE:OCDO) is a FTSE 100 dropout and now resides in the FTSE 250. At its peak, the company was worth around £23bn. I believe that made it the UK’s most expensive grocer at the time.

Its time, however, was the pandemic when investors bet on a sustained movement towards food delivery. They rushed to buy shares in the online grocer and warehouse logistics company.

Four years later we can now say that this bet hasn’t proved to be a profitable one. And the bad news keeps coming for shareholders as the stock is down 59% over the past 12 months.

So, are we looking at an unmissable bargain, or is it time to forget about Ocado?

Often misunderstood

I want to start by highlighting that Ocado is often misunderstood by investors who focus primarily on its grocery business, overlooking its value as a technology company.

The core of its potential lies in its Ocado Smart Platform (OSP). This is a sophisticated end-to-end e-commerce, fulfilment, and logistics solution designed for online grocery retail.

If you’re interest in how this works, it’s definitely worth checking out the company’s OSP video here.

This technology is licensed to major retailers worldwide. It offers them a turnkey solution to compete in the digital grocery space. This proprietary tech fuses robotics, AI, and automation systems to enable efficient warehouse operations and last-mile delivery.

Never-ending path to profitability

Ocado’s quest for profitability has been a long journey with plenty of setbacks for shareholders. Despite its innovative technology and growing licensing partnerships, the company has struggled to turn a profit since its inception in 2000.

Over the years, it has invested heavily in its automated warehouse technology and the OSP. While these investments have made it a leader in e-commerce solutions for grocery retail, they’ve also resulted in significant ongoing costs.

The company’s retail division has also faced challenges, including increased competition from the rest of the supermarkets sector and changing consumer behaviours. According to the latest Kantar data, Ocado has just 1.9% market share in Great Britain.

As such, the hunt for profitability remains elusive. Based on consensus forecasts, Ocado isn’t expected to break even in the near future. Negative price-to-earnings (P/E) ratios are projected for the medium term: -8.49 times in 2024; -8.59 times in 2025; and -9.55 times in 2026.

Mixed opinions

I’m very cautious about investing in companies that don’t have an obvious path to profitability. I’m also very wary of debt, and Ocado has £1.48bn of it (net debt is £735.6m).

Analysts and institutions have very mixed opinions. There are currently four Buy ratings, four Hold ratings, four Underperform ratings, and two Sell ratings.

Despite this consensus opinion sitting on the negative side, the average share price target is 77% above the current stock price. However, sometimes these figures needed to be taken with a pinch of salt. They can also get outdated very quickly.

It’s certainly not an unmissable bargain, but I think it’s a stock worth keeping an eye on. Fortunes can change fast.

The post Down 59%, is this FTSE 100 dropout an unmissable bargain? appeared first on The Motley Fool UK.

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James Fox has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.