As the Ocado share price drops 9% on FY25 results, should I buy this FTSE 250 stock?
Ocado (LSE:OCDO) is known for having images of fresh fruit and vegetables on its delivery vans, but its share price has been anything but healthy. Just when you think it can’t go any lower, it does.
And the stock was up to its old tricks today (26 February), shedding another 9% after the grocery-robotics firm published its FY25 annual results.
Shockingly, this means Ocado stock has lost 92% of its market value since September 2020!
What on earth has gone wrong?
As I see it, Ocado essentially has two parts to its business. There’s the online supermarket operation in partnership with Marks and Spencer, involving those delivery vans zipping about everywhere. Ocado Retail, while deconsolidated from group financial results, is enabled by its Ocado Logistics unit.
Then there’s the Technology Solutions bit, which powers robot-operated warehouses for overseas grocers like Kroger (US), Aeon (Japan), and Coles (Australia). This is where the real growth potential has always resided.
The share price’s peak coincided with the height of the pandemic, a time when online grocery deliveries boomed. Since then, loss-making Ocado has failed to convince investors that its capital-intensive business model can ever generate reliable profits.
Moreover, partners Kroger and Canada’s Sobeys have decided to close some underutilised customer fulfilment centres (CFCs). This has hammered sentiment for the FTSE 250 stock, which is now down 37% in six months.
FY25 results are out
However, Ocado is still managing to grow. In the 52 weeks to the end of November, revenue was up 12.1% to £1.36bn, with double-digit growth in both divisions (Technology Solutions and Ocado Logistics).
There were 72m orders shipped worldwide in the year, representing 26% growth in weekly CFC volumes. However, only four modules were added to CFCs in the US, UK and Poland.
The biggest problem for Ocado has been its hefty losses, with profits always just over the next horizon, despite being founded almost 26 years ago. And while adjusted EBITDA jumped 59% to £178m, there was still a £353m adjusted loss.
Looking ahead however, management expects the business to turn cash flow positive in the second half of this year, before making that a full year in 2027. And it anticipates up to 25 new CFC modules over the next couple of years, offsetting the closures in North America.
Unfortunately, 1,000 jobs will be axed to help save £150m (around 5% of its global workforce), with most coming at its HQ in Hertfordshire.
Time to buy?
On a positive note, exclusivity arrangements have now concluded in most international markets. This leaves Ocado free to pursue new partnerships and growth opportunities.
But will any overseas supermarkets take the leap? Many are focusing on fulfilling online orders from stores, which involves good old flesh-and-blood humans rather than new-fashioned robots.
Perhaps this will change in future, but for now this seems to be the reality. The fact Kroger and Sobeys are downsizing isn’t a good signal to other retailers.
If Ocado lands new contracts and turns cash flow positive, the stock could rebound strongly from just over 200p today. However, due to the uncertainty and ongoing losses, I’m not convinced enough to invest.
To my mind, there are better growth stocks to consider in the FTSE 250 today.
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Ben McPoland 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.
