Ocado business model is broken: should you buy its shares?

Ocado (LON: OCDO) share price recoiled on Thursday as the fallout of its weak earnings continued. The stock plunged to a low of 515p, the lowest point since November. It has plunged by more than 35% from its highest point this year, meaning that it is in a deep bear market.

Ocado’s broken business model

Ocado, one of the best-known players in the UK’s e-commerce industry, has a broken business model. This was evident in the company’s most recent financial results. In a statement, the firm said that its revenue remained flat at £2.5 billion pounds in 2022. Ocado Retail’s business decelerated by 3% to £2.2 billion, meaning that Ocado Solutions revenue was just £802 million.

The main figure that made headlines was the £501 million loss that the company made during the year. It had previously lost hundreds of millions of pounds in the previous year. Worse, these losses are expected to continue rising considering that the company is still investing heavily in its solutions business. Ocado has invested billions and lost billions in the past decade.

This goes to show that the company’s business model is broken. Its retail business has limited room for growth, especially after the strong revenue performance during the pandemic. At the same time, its solutions business has had a relatively slow revenue growth. In all of 2022, the company added just 2 new partners. It now serves about 12 partners around the world.

Ocado is burning cash fast. In June last year, the company increased diluting its shareholder by raising capital. It ended the year with £1.3 billion in cash, dowmm from the prior year’s £1.4 billion. Therefore, it will take some more time for the company to become profitable. 

Ocado share price forecast

OCDO stock by TradingView

On the 1D chart, we see that the OCDO stock price has been in a strong bearish trend in the past few months. It made a bearish breakout and crashed to a low of 513p, which was lower than the key support level at 692p, the lowest point on May 12. The shares have moved below the 50-day moving average and the crucial support at 611p, the lowest point in December.

Therefore, the outlook of the Ocado share price is bearish, with the next key level to watch being at 382p, which is about 28% below the current level. The stop-loss of this trade will be at 611p. The bearish view is in line with my previous bearish bets on the company, as you can read here.

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