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Last week was another tough one. Ocado (LSE:OCDO) share price fell 19%, to close the week at 733p. Ocado shares have fallen 65% in the past year, compounded by poor results in H1 2022. When I last wrote about the stock in July, I said I was leading from it. But after another fall, is now the right time to buy?
Inflation is on the rise.
Nothing has changed at Ocado in the past few weeks. Instead, the bottom line is what’s happening in the broader economy.
UK inflation came in at 10.1% in July, the figure comes after H1 results. As a result, I have seen the risk of the business around the cost of inflation. If that was a concern back when the report was being written, it will be even worse now. Not only this, inflation is expected to be higher in the next six months.
So I think investors are clearly concerned about how rising prices in the future will leave Ocado with a small profit margin from the retail division. Or it could lose customers’ business if it raises grocery prices.
Even for the logistics arm, inflation is a headwind. It mostly serves other companies in the same sector, all of which feel more expensive. This may mean reduced use of the Service.
Very dependent on retail
While Ocado is making good progress in the UK and its global solutions and logistics arm, the retail side of the business is lagging behind. For example, in H1 the former generated around £453m in revenue and the latter £1.12bn.
For all the good work being done, I feel that Ocado is very vulnerable to a downturn in consumer demand from the retail sector. Clients are starting to get pinched in the cost of living crisis. Switching grocery shopping to cheaper brands is something I think many will do.
As Ocado cannot compensate for this potential hack with other areas of the group, I don’t think the outlook is good. Last week’s fall in stock prices makes me think I’m not alone in this thinking.
Price in Ocado shares
Some argue that it is a good time to buy, citing that the business is undervalued. The fact that the company is losing money means that I cannot use a standard price-to-earnings ratio to calculate this. But any stock that loses 65% in a year can be a smart long-term play.
Additionally, Ocado could weather the storm if inflation peaks this winter and moderates early next year. It is only a medium-term issue and not something that will fundamentally disrupt the business model.
But in the end, I still can’t be happy about the prospects of the business, so I don’t invest.