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Finding the best stocks to buy is never an easy task. And while there are plenty of promising growth stories to capitalise on today, most won’t live up to expectations. One company that falls into that category for me right now is Ocado Group (LSE:OCDO).
My views on this enterprise have soured over the years as the true cost of its robotic automated warehouse technology emerged. And while significant revenue growth has finally started to materialise, there are still some notable question marks surrounding this business.
Digging into the details the whole thing
Ocado’s best known as an online grocery retailer. However, for several years now, management has been steadily transitioning the business into a robotics enterprise. Companies can now use its technology to automate the preparation of customer orders within a warehouse, which Ocado calls Customer Fulfilment Centres (CFCs).
As per the latest results, there are currently 25 CFCs operating under Ocado’s ecosystem, with a minimum of seven more expected to be added over the next three years. If everything goes according to plan, the firm’s recent record-breaking £3.2bn of revenue could be just the tip of the iceberg.
Needless to say, that sounds rather promising. However, digging deeper, I’m sceptical management will succeed in meeting its goals on time.
The firm already has a mixed history of delivering on its stated targets. And some of the planned CFC openings are simply existing projects that have been delayed. At the same time, a few of its key customers appear to have a lukewarm reception to the technology.
In the US, Kroger’s already slowed the pace of deploying Ocado’s robots. Meanwhile, in Canada, Sobeys has paused its adoption plans indefinitely. That’s despite both firms reporting strong sales growth. In the meantime, Ocado’s losses remain substantial, landing at £374.3m in 2024 after already burning through £387m in 2023.
As such, despite delivering record top-line growth, Ocado shares tumbled by roughly another 20% on the back of its latest earnings, dragging its 12-month performance to -42%.
Looking on the bright side
Despite the negatives, Ocado’s latest results did have some welcome bright spots. While earnings have a lot of room for improvement, the group’s underlying cash outflow was effectively slashed in half, falling from £472.5m to £223.7m.
Management attributes this success to higher EBITDA margins and improved capital expenditure. And this positive trend is expected to continue over the next two years, entering the black before the end of 2026.
Suppose the firm’s successful in hitting this target? In that case, the improved financial flexibility will give management some much-needed breathing space in terms of managing its debt burden. Not to mention, it paves the way for reaching profitability.
Considering the relatively low price point at which shares are currently trading, today’s valuation may present an exceptional buying opportunity. However, that’s all dependent on management hitting its goals. And as previously stated, Ocado’s poor track record doesn’t exactly fill me with confidence.
That’s why, despite the potential, this business isn’t joining my ‘best stocks to buy’ list. At least, not until I see more progress.
