The FTSE 100 company I’m highlighting today is Ocado (LSE: OCDO). It has a £9bn market cap and its operating segments include retail, UK solutions & logistics, and international solutions. Most people are familiar with Ocado from its retail segment, which provides online grocery and general merchandise offerings to customers in the UK.
Ocado to outperform the FTSE 100 in 2022?
In a research note on 23 February, Royal Bank of Canada put a target price of 1,700p on Ocado, which is 43% higher than its current share price. If Ocado hits this within the next few years then it will almost certainly outperform the FTSE 100.
Bear in mind that one of the biggest drags on the FTSE 100 index last year was Ocado, as its shares fell 11.6% after it posted steep losses. In total, Ocado shares declined 27% last year; however, in 2020 it went up 78.8% while the FTSE 100 returned a loss of –14% for the year.
Highly innovative FTSE 100 technology companies often require substantial profit reinvestment to continue growing through research and development. This is no different with Ocado, as it continues to develop its cutting-edge robotics and artificial intelligence technology. Recent development in its robotics is largely down to joining forces with Kindred Systems and Haddington Dynamics.
Ocado’s robotics are used for a wide range of activities including:
- Developing smart robotic systems to make them more efficient at picking and packing customer orders.
- Designing bots that fulfill orders in Ocado’s customer fulfillment centres.
- Enhancing picking stations and developing a grid that’s tolerant to seismic events.
Ocado designs, builds and operates smart mobile machines, which operate by collaborating to achieve unprecedented efficiency at picking and packing items. Artificial intelligence and machine-learning algorithms are also powerful tools being utilised by the company. The algorithms learn about what you like, which helps Ocado tailor offers relevant to you, helping you find what you need through a personalised experience. The artificial intelligence tools help power forecasts to predict demand, reduce waste and maximise the availability of fresh food. It’s clear to see that Ocado uses cutting-edge technology compared to most of the other food delivery service companies in the FTSE 100.
Declining earnings
Ocado reported a 12.1% fall in earnings before interest, tax, depreciation and amortisation (EBITDA) to £61m for 2021. A net loss of £223.2m for 2021, and a loss of £134.3m for 2020 does not look attractive to me, especially as supermarket spending during the lockdowns increased.
For 2022, Ocado’s finance chief Stephen Daintith told reporters that the company was planning £30m more investment in its International Solutions technology business than the market had anticipated. The upcoming earnings in 2022 may surprise many, therefore I’m not tempted to buy at the current price. Instead, I’d rather wait for Ocado to report stronger earnings, which could potentially see its share price soar again. Ocado is very volatile compared to most of the other FTSE 100 stocks, therefore I consider this a higher-risk stock for potentially a higher reward.