FTSE 100 online retailer Ocado (LSE: OCDO) released its results for its 2020 financial year earlier this week. These showed continued robust growth. But this UK share’s price hasn’t exactly soared since.
To me, this raises a question: Do investors now think that Ocado’s growth spurt is over? It has seen a sharp sales increase in the lockdowns, as online shopping became both the safer and the more convenient option for consumers.
The question is important for me as a long-term investor because a growing company’s share price is far more likely to continue its upward trajectory and vice versa.
3 ways to assess OCDO’s future share price trajectory
To assess this, I looked at it in three ways. The first was to compare the sales performance pre-pandemic with that now. The second was to consider its outlook for 2021, and the third was to take a broad look at the growth prospects for the industry it operates in.
Sales growth
Ocado’s sales for its 2020 financial year showed an almost 33% growth rate, which is significantly faster than that seen in the past years. On average, its revenue growth was at 11.5% in the last three years. This suggests that there could be a slow down in growth after the pandemic is over.
However, it’s likely that some consumers who were buying groceries in-store earlier have converted to online purchases now. This is corroborated by a survey OCDO mentions in its release. As per this, 7 out of 10 first-time customers in the US said they will continue with the practice of online shopping even after the pandemic.
Outlook for the next year
Following from here, I would think that even if OCDO’s sales growth does decline, it could still be higher than it was earlier. Which brings me to the second point, its outlook.
Ocado doesn’t give a clear picture of its expected retail revenue, its big revenue generator. It just says that that is dependent on Covid-19-related restrictions.
I think this further confirms that some decline in sales can be expected. This is further backed up by analyst estimates as compiled by the Financial Times, according to which revenue for 2021 will grow by 17.4%.
Forecasts are, of course, subject to change, as the overall environment alters, so they can’t be taken as a given. However, they can add to the overall picture.
Long-term opportunities for OCDO
Even though this growth rate is a decline from 2020, I think it does continue to support the overall growth story for Ocado. This is especially so since it’s in an expanding industry. This brings me to the third point.
Ocado estimates its target market has a size of £2.8trn, of which its current partners have a 7.5% market share. This leaves a significant opportunity. It also sees opportunities outside groceries, such as in apparel.
I’m a believer in the OCDO story. It’s even my stock for 2021, and so far its share price is up around 15% in the year. I’ve bought this UK share and plan to hold it for the long term, even though I’m aware that there’s a risk from slowing growth post lockdowns.