Down More Than 85% From Highs, Is Ocado Stock (LON: OCDO) A Buy?

Ocado Group plc, the UK-based online grocery expert and technology firm, has seen its share price (OCDO.L) plummet by more than 85% since the highs of early 2021.

Having revisited a level above 2800p first hit in Sep 2020 again in Feb 21, the firm has since seen prices nosedive, to a point where the analysts consensus forecast of 511.44p actually represents an upside potential of more than 44%. With such a gain on analysts views, and a stock price that sits at depressed levels, it's easy to wonder whether Ocado shares (LON: OCDO) are now potentially a value buy?

Despite positive operational indicators such as a rise in orders and a growing customer base, the company's financial results have not reflected similar success. For five consecutive years, Ocado's reports have been marked by losses, causing hesitancy among some investors considering the stock.

Looking at the numbers more closely, Ocado's significant investments in infrastructure and technology are evident as substantial depreciations and amortizations, along with considerable interest expenses due to borrowed funds, are recurrent themes in their financial statements. This is indicative of a company that is in an expansion phase, investing heavily for future growth. However, the payoff for these investments is yet to be realized in the form of consistent profitability.

Analysts have some faith that the situation will improve, projecting a decrease in losses for Ocado over the next three financial years. Yet, despite these forecasts, there remains the estimation that achieving post-tax profits could be several years away. This places Ocado in a challenging position where immediate financial gains are not expected for shareholders.

Looking at the price targets on file, analysts covering LON:OCDO have a high bar of 997p, set against a low of 368p. Considering the current trading price of the stock is 353p, the view from the street seems to be that there is significantly more upside than down but you will still want to exercise caution. The last 12 months have continued to see pullbacks, with 14% downside not exactly screaming momentum shift, but at close to 52 week lows, the fundamentals might warrant a closer look.

A key aspect of Ocado's valuation is its market price compared to its book value. Currently, the market values Ocado at £3 billion, which is twice its book value—striking for a company that has witnessed only three profitable years since its formation. This raises concerns about overvaluation despite the growth potential tied to its innovative technology and e-commerce reputation.

Ocado's continued alliance with Marks & Spencer in the form of the Ocado Retail joint venture offers a silver lining, showing promising growth in operational metrics, particularly in the average number of orders and active customers. Yet, while this partnership indicates potential, it does not entirely alleviate concerns over the company's overall profitability and financial health.

The company remains optimistic about its future, banking on the potential to license its proprietary technology and purports there is a $130 billion global market awaiting its solutions. Such optimism, however, needs to be balanced against the financial realities and existing market perceptions. Despite its pioneering role in technology and e-commerce, Ocado's heavy reliance on grocery sales makes it appear more as a retailer than an innovative tech company, which could affect investor sentiment and valuation factors.

While Ocado's stride in operational metrics and innovation signal growth, the financial performance and resultant share price trend raise questions about its current valuation and profitability horizon. In a stock that has seen such a dip, it is often worth a look, but sometimes that is all you will want to do. There could be significant upside in Ocado stock, but the risk will need to be carefully weighed. With the next earnings not due for a month or so, there is time to see how this one develops.