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Can the failed online supermarket Ocado deliver the goods?

Ocado, the tech-focused online supermarket, divides opinion. It is the Marmite of business: investors either love it, trusting in its potential to produce good rewards, or they hate it precisely because of its promise of ‘jam tomorrow’.

Shares of the company, founded 22 years ago and named after avocado, minus the first two letters, have plummeted.

At the height of the pandemic-driven home delivery boom in September 2020, shares reached 2,800 pence each. They are now 70 per cent lower, at 810.8 pence.

Can the failed online supermarket Ocado deliver the goods

Does this represent a reality check? Or a mere setback on the way to fulfilling the 2020 prediction that the price could hit £100 by 2030?

After all, as Hargreaves Lansdown puts it: ‘Ocado is the only global provider of an end-to-end online grocery platform’, which is interesting for those eager to back British innovation.

FundCalibre’s Darius McDermott says stocks may have been overvalued in the age of Covid, but the deployment of AI and robotics makes Ocado different: “It’s much more than a grocery store.”

Reflecting this status, Ocado’s £5.8bn market capitalization exceeds that of Sainsbury’s, which is £5.4bn. But critics say that, unlike Sainsbury’s, Ocado has only turned a profit three times in its history and may struggle to do so in the future.

Huge spending is required to develop the robotic grocery-picking technology that Ocado uses, but is also sold to other supermarkets, including Kroger, an American chain, Spain’s Alcampo, and France-based Casino. However, some question how lucrative these deals are.

Meanwhile, Ocado Retail’s revenue growth is slowing, thanks to higher energy bills, the cost of living and a cooling love affair with online shopping. This joint venture with Marks & Spencer is the business behind the delivery vans you see on the streets.

Grocery delivery is also becoming more competitive. Sainsbury’s and Tesco have successfully expanded this part of their operations. These and other supermarkets are partnering with apps like Getir, Gorillas and Zapp that provide fast delivery of avocados and other necessities.

Ocado has been forced to rebrand its own Zoom app as Zoom by Ocado. The ‘Z’ in the original logo was considered to resemble the ‘Z’ that became Russia’s insignia in the Ukrainian war.

Another bone of contention is the remuneration of Tim Steiner, head of Ocado since 2000. Under an incentive plan, he could get 100 million pounds over five years. Royal London Asset Management (RLAM) was among those who voted against the plan this month.

The Ocado faithful, relieved to have won a crucial legal battle with Norwegian robot group Autostore over patents, think Steiner deserves such rewards.

They point out the reward that could arise during that period if you succeed in the robot wars.

Its 600 Series robot, produced by 3-D printing, is forecast to cut labor costs by a third. Bernstein brokers have said such advances could turn Ocado warehouses, or CFCs (customer care centers) into ‘ATMs’.

In fact, the company expects EBITDA from CFCs to increase by 50 percent. Ocado defines EBITDA as earnings before net finance cost, taxes, depreciation, amortization, impairment and exceptional items.

You may never have subscribed to the almost messianic belief that surrounds Ocado. But you do have a stake in it if you save in RLAM funds, or Baillie Gifford’s Edinburgh Worldwide and Global Discovery trusts. If you’ve owned stocks for a decade, you’ve seen a 570 percent rise in value, which may incline you to tolerate the current problem in hopes of recovery.

HSBC has upgraded the shares from ‘sell’ to ‘hold’, although it has cut its price target from 1,100 pence to 1,000 pence. Credit Suisse also lowered its price target from 1,650 pence to 1,600 pence, but this broker expects Ocado to outperform.

Rathbone’s David Coombs warns that Covid-era high prices may not be reached again for the next five years.

He adds: ‘I’ve always wanted to buy Ocado. But I’ve never been able to do that because even though he has a great, great story, he hasn’t delivered on it. During the pandemic, it didn’t take full advantage of making the most of the customer base.’

At the time, as a long time customer, I was unable to get a delivery schedule. The broader doubt caused by this irritation made me decide not to buy the shares.

The desire to grab a bargain can be hard to resist when prices have dropped. However, it may be wiser to consider stocks whose prices have dropped, not crashed.

Take that other company named after a fruit: Apple. Its shares are down 19 percent this year. There will be more pain ahead, but also more gains, which matter now more than ever.

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