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Ocado’s (LSE: OCDO) share price has plummeted 44% from its 9 October one-year traded high of £4.10. The online supermarket and technology group is now trading near price levels not consistently seen since November 2017.
Such a huge price drop could indicate that the underlying business is fundamentally worth less than it was before.
Or it could signal that the market’s pricing of the stock does not accurately reflect the business’s value.
After all, price is whatever the market will pay for a share at any given point. Value reflects the true worth of the underlying business.
If the latter is true, then a major bargain could be had. So, I set about trying to establish which is true here.
Why’s the price gone down?
Sometimes, a stock’s price can be hit by the market over short-term factors that are likely to disappear in the long term.
As a long-term investor for the past 30 years, this is the sort of thing I like to see. It can create a perfect short-term risk/long-term reward play that can yield huge profits over time from the price-valuation gap.
In Ocado’s case, a key factor in the price fall was a 12 September statement by US partner Kroger. The firm said it was conducting a site-by-site review of its automated fulfilment network — a core part of Ocado’s growth strategy. This triggered fears that Kroger was considering a withdrawal from its planned investment in the automated warehouses. Ocado stock fell 19% on the day.
Neither Kroger nor Ocado have said anything more on the subject. However, it remains a huge short- and long-term risk for the stock, in my view.
Prior to this, the price suffered from two other factors in particular. The first is the ongoing cost impact of the rise in employers’ National Insurance (NI) in last October’s Budget. This also looks another lasting risk to me, unless it is revoked.
The second is the continued cost-of-living crisis in the UK, which I also believe may continue for several years.
How have the company’s results been?
Ocado’s H1 2025 results released on 17 July contained some positive numbers.
Revenue jumped 13.2% year on year to £674m against analysts’ forecasts of £634m. Adjusted earnings before interest, taxes, depreciation, and amortisation soared 77% to £91.8m.
As it stands, consensus analysts’ forecasts are that Ocado’s earnings will grow by 8.6% a year to end-2027. And it is growth here that powers any firm’s stock price over time.
However, these projections do not factor in any withdrawal of Kroger from Ocado.
The price-valuation gap
That said, as it stands, the discounted cash flow for Ocado shows only a 16% undervaluation for the stock.
This is of no interest to me, as any such gain could be quickly nullified by high market volatility.
As such — and especially given the potentially far-reaching consequences of Kroger’s decision on Ocado – the share price does not look an unmissable bargain to me now. And I will not be buying it for the time being.
