Ocado Shares Down 3% in July – Time to Buy OCDO Shares?

Ocado shares accumulate a 3% loss since July started as the negative momentum prompted by the progressive rollout of vaccines in the United Kingdom seems to be enduring.

Meanwhile, the price of the stock is heading down 1.5% this morning following the release of the firm’s interim results covering the 26 weeks ended on 30 May this year, even though the company reported a 21.4% advance in its top-line results, with sales landing at £1.32 billion compared to £1.09 billion the firm sold a year ago.

Meanwhile, Ocado managed to trim its interim pre-tax losses by £17 million as its negative bottom-line profitability landed at £23.6 million compared to the £40.6 million the company shed a year ago.

Moreover, the firm announced a partnership with Auchan Retail to assist the company in developing a Customer Fulfillment Center (CFC) that will serve the Madrid region while the retail giant will also rely on Ocado’s software to improve its pick-up services nationwide.

Is the market being too pessimistic about Ocado’s future? Is this an opportunity to buy some shares of this growing online grocery and software solutions company at a bargain? The following article takes a closer look at Ocado shares to see if that might be the case or not.

Ocado shares – technical analysis

Ocado shares have experienced a sharp decline since they posted a double-top formation back in February this year, with the price rejecting a move above the 2,900p level two or three times in roughly 5 months.

Since then, the share price has dipped as much as 31.5%, with shares of the online grocery store finding support lately at the 1,820p level only weeks before this interim report came out.

For Ocado, the end of the pandemic in the United Kingdom could result in a slowdown in the growth rates the company experienced during the health crisis as consumers might decide to go back to physical grocery stores rather than relying on the firm’s online solution to stock up on essentials.

However, the company seems to be defying these pessimistic expectations as it has maintained its outlook for 2021 unchanged despite the easing of COVID-related restrictions in the UK.

The chart above shows that the price of Ocado shares has bounced off the 1,820p area while surging above the 1,900p level in the past few days – these being key areas of support for Ocado shares from a historical standpoint.

Meanwhile, the downtrend shown in the chart has been broken as a result of this bounce and this could prompt the beginning of a new bullish cycle for the stock. Interestingly, momentum readings seem to have bottomed at this 1,820p level as shown by the Relative Strength Index (RSI) and the MACD, with both posting similar readings despite the price moving to a lower low.

This indicates a bullish divergence that could have prompted this latest uptrend in the price of Ocado shares.

Moreover, the stock’s short-term moving averages are about to post a golden cross, which is another bullish setup that could end up pushing the price of Ocado to new highs. For now, the outlook for the stock from a technical standpoint is bullish, with a first plausible target set at 2,250p for a 13.3% potential upside as long as the stock price remains above the 20-day and 50-day moving averages.

Ocado shares – fundamental analysis

Ocado revenues have been growing steadily since 2016, with the firm’s top-line results moving from £1.27 billion to £1.76 billion by the end of 2019 at an 11.5% CAGR while sales surged to $2.33 billion in 2020 as the pandemic provided a strong tailwind to the business.

Meanwhile, gross margins for Ocado have been improving, moving from 36% back in 2015 to 43% last year. However, bottom-line profitability has been elusive for the online grocery store as the company has reported net losses in the past four years.

Moreover, the company has produced negative free cash flows in the past four years amid elevated capital expenditures resulting from the development of its fulfillment facilities.

Today’s interim report shows that Ocado holds around £1.7 billion in long-term debt that was almost fully covered by the firm’s cash reserves.

Based on today’s market capitalization of £14.9 billion, Ocado is being valued at 6.4 times its sales from last year while the fact that the company has managed to grow its top-line results during these first months of the year at a rate that exceeds its annual pre-pandemic CAGR is particularly encouraging.

However, determining if the current valuation is attractive or not is particularly hard due to Ocado’s inability to turn a profit at the moment. This factor alone possibly opens up the door for more volatility as market participants keep struggling to forecast where the firm might be heading now that the pandemic tailwind is fading.

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