Ocado share price analysis: a bargain or a value trap?

Ocado (LON: OCDO) share price has continued to underperform the FTSE 100 and FTSE 250 indices this year. It has crashed by over 60% in 2024 while the Footsie has risen by 5%. The same has happened in the past five years as the stock has dropped by 75% while the index has risen by 8%.

Ocado has been a fallen angel

Ocado Group has become one of the top fallen angels in London. Over the years, its stock has crashed from 2,917p in 2020 to just 300p today. It has also been booted from the FTSE 100 index as its valuation slumped. 

This crash has happened as the company has faced numerous challenges over the years. While Ocado Retail’s business is doing well, its warehousing division has struggled substantially in the past few years. 

The biggest challenge with the warehousing business is that it is an expensive one to implenent and there are concerns about its profitability. Over the years, the company has spent substantial sums of money in capital expenditure. 

In 2023, it spent over £536 million in capex, an improvement from the £736 million it spent a year earlier. It has spent billions of pounds in capex in the past decade and the trend will likely continue. 

Ocado has added some well-known retail brands like Kroger and Albertsons as clients, which is a positive thing since these contracts will likely run for years. It is also unclear whether the contracts allow the retailers to substitute Ocado.

Just last month, Sobey’s the third-biggest retailer in Canada, decided to pause the fourth warehouse in the country. Sobey’s also ended its exclusive relationship with Ocado, meaning that it can work with other companies in the industry. 

Ocado has also not unveiled any major partner in the past few months, meaning that the business is slowing. The most recent sign up was Panda Retail Company, a Saudi Arabian company that aims to become a leading player in e-commerce.

Ocado has some positives

On the positive side, Ocado is reducing its capital expenditure, a move that will likely reduce its losses in the next few years. It expects that three CFCs, two for Coles in Melbourne and one for Alcampo in Madrid will go online this year. 

The other positive is that Ocado Retail is doing relatively well. Its financials show that the division’s revenue rose by 7% in 2023, helped by strong customer growth and the average price of a basket. 

The retail division’s share of online grocery increased from 12.3% in 2022 to 12.7% while the share of the overall retail sector rose to 1.7%. That means that the company’s growth has room to grow as more people in the UK embrace online shopping.

Altogether, Ocado has more cons than positives. While its retail division is growing, it is still making substantial losses and may need to raise more capital either this year or in 2025 as it ended the year with £880 million in cash and over £1 billion in debt.

Ocado share price forecast

OCDO chart by TradingView

The weekly chart reveals that the OCDO stock price has been in a strong freefall for a long time. It crashed below the support at 343.6p, its lowest point in May last year after Sobey’s paused its fourth warehouse and ended its exclusive agreement.

Ocado has remained below the 50-week and 100-week Exponential Moving Averages (EMA). at the same time, the stock’s Relative Strength Index (RSI) has moved below the oversold level while the two lines of the MACD has dropped below zero.

Therefore, the stock will likely continue falling this year, with the next point to watch being at 250p. This decline is in line with my previous Ocado forecasts.