In a bid to inject a bit of excitement into my portfolio, I decided to look for a red-hot FTSE 250 share or two. I’ve assembled a balanced portfolio of FTSE 100 blue-chips over the last year, and wanted something with mightier growth potential.
I instantly spotted a familiar name: online grocer and logistics group Ocado Group (LSE: OCDO). It only crashed out of the FTSE 100 on 21 June, after a six-year stint.
To be honest, I’m surprised it lasted that long. After peaking at 2,808p in February 2021, the Ocado share price had lost almost 90% of its value.
The share price is a wild ride
Its fall from grace was probably inevitable. UK-focused investors had been desperate for a company that could match the US tech behemoths for growth potential, and decided Ocado was our best shot.
Its customer fulfilment centres (CFCs), powered by the automated Ocado Smart Platform, are unquestionably state-of-the-art. Ocado’s cutting-edge automated robots picking and packing offer grocery companies worldwide huge potential efficiency savings.
The problem – as with every tech starlet – is that they demand heaps of capital investment, with profits coming further down the line. That makes life harder for UK-based hopefuls, which have a smaller pool of capital.
Higher inflation and interest rates have reduced the future value of those profits, while pushing up the cost of capital. Worse, Ocado continues to lose money every year, as my table shows, and the board admits it could have to wait six years to bank a pre-tax profit.
| Year ending | 2019 | 2020 | 2021 | 2022 | 2023 |
| Revenue | £1.756bn | £2.331bn | £2.498bn | £2.517bn | £2.825bn |
| Pre-tax profits | -£214.5m | -£52.3m | -£176.9m | -£500.8m | -£403.2m |
Despite this, Ocado shares have jumped 21% in the last month (although they’re still down 33% over the year).
They got a lift on 19 September when the board upgraded revenue guidance for its retail arm, following a 15.5% leap in Q3 revenues to £658m. The joint venture with M&S now boasts more than a million active customers, despite being embroiled in a £160m legal battle. Ultimately though, it’s the CFCs that matter.
Huge rewards, huge risks
There was good news here on 27 August, when the board announced two new centres for Australian grocer Coles were finally operating after a two-year delay. That lifted the global total to 25 sites.
For Ocado to fly, it needs to justify the hefty investment in CFCs with a steady stream of new openings. Yet it’s not getting the bookings fast enough. Lingering inflation, high interest rates and fears of a US hard landing aren’t helping.
Buying Ocado shares today is a leap of faith. Usual metrics such as the price-to-earnings ratio and earnings-per-share forecasts are hard to find. Naturally, there’s no dividend, and won’t be for the foreseeable future.
Its shares will remain hugely volatile. Investors pile in when they’re feeling bullish, flee when sentiment dips. They could just as easily crash 21% next month. Or more.
Ocado shares may be about to explode, but they could just as easily implode. I don’t normally take this kind of risk but once in a lifetime, eh?
This post was originally published on Motley Fool
