Why has the Ocado share price fallen 20% since September? And what would I do now?

Alan Oscroft
·3-min read
Graph of price moves, possibly in FTSE 100
Graph of price moves, possibly in FTSE 100

Those who invested in Ocado (LSE: OCDO) at its peak in late September are sitting on a 20% loss today. Still, investors who bought at the start of the year are on a 75% gain so far. But why has the Ocado share price fallen so much in the past couple of months?

There are now three Covid-19 vaccines showing good results, but we only learned of those this month. So it’s not just that. I reckon there’s also been a lot of profit taking, for one thing. The bigger mystery to me is why the shares soared so high in the first place.

After the lockdown hit, it was clear that online sales would get a boost. That’s proved to be the case, with Tesco a good example. Online sales look set to account for around £5.5bn at Tesco in 2020, up from £3.3bn in 2019. And that still only accounts for about 16% of Tesco’s total sales.

Ocado share price peak

Ocado, incidentally, briefly exceeded the market cap of Tesco earlier this year. But the position has reversed again since the Ocado share price has fallen back and Tesco’s has risen.

I’m convinced that the pandemic has merely brought the large-scale shift to online selling forward. I really don’t see any going back from this year’s progress. Now, Ocado is clearly a leader in the field of online retail technology, and buying the best can reward us with long-term growth profits.

But, I’ve watched so many internet-based growth businesses in the past couple of decades. And every single one attracted way too much optimism in its early days and became horribly overvalued. And I can’t help thinking the Ocado share price has gone exactly the same way in 2020.

Growth stock booms and busts

Every one of those over-extended growth shares fell back. Look at ASOS, for example. The ASOS share price is still way down on the heights it reached as long ago as 2014. And that’s after flying even higher in 2018 before another phenomenal crunch.

The Ocado share price hasn’t really gone through the growth share booms and busts yet. Or rather, I think it could well be going through its first.

Fundamental valuations are hard to make much sense of in situations like this. A price-to-earnings (P/E) ratio can make little sense, for example, for a company whose earnings are still some way in the future. But I always like to remember that ASOS shares were trading at P/E multiples of around 80 at their 2018 peak. In 2020, with the price way down from then, we’re looking at a forward P/E of a relatively modest 40 or so. And that’s on bigger earnings.

No profit, no P/E

What about Ocado? The company is still making losses, so there’s no earnings figure to compare to the Ocado share price. Ocado did record a profit in 2016, but with its shares on a P/E of around 270. Revenue is a fair bit higher now, which softens that a bit.

But I fear Ocado’s first few years of sustainable profits will be at astronomical P/E values. That is, if the Ocado share price maintains today’s levels. And I really don’t think it will. I’d buy Tesco and ASOS now, mind.

The post Why has the Ocado share price fallen 20% since September? And what would I do now? appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS and Tesco. 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.

Motley Fool UK 2020