Ocado (LSE: OCDO) shares were one of the best performing large-cap investments in 2020. However, shares in the retailer have struggled in 2021. Year-to-date, the stock’s fallen around 26%. It’s off nearly 30% over the past 12 months.
The stock has underperformed even though the underlying business has continued to grow. As such, I’ve been wondering if now’s the right time for me to buy shares in the retailer to take advantage of recent declines. Or if I should continue to sit on the sidelines to see what happens next?
Growth and challenges
The coronavirus pandemic generated a windfall for Ocado. Group revenues jumped by nearly a third in 2020. And it doesn’t look as if this was a one-off. Based on its latest results, revenues increased 21% year-on-year for the three months ending May.
This puts the company on track to earn around £3bn in revenue for its current financial year. That’s a substantial increase on the £2.3bn reported for fiscal 2020.
Unfortunately, despite the company’s growth, it’s still losing money. Thanks to heavy investments in technology and capital spending, losses hit £126m in 2020. For the three months to the end of May, losses totalled nearly £39m. It seems to me as if these losses are weighing heavily on Ocado shares.
This spending’s likely to continue for the foreseeable future. Ocado has some big projects planned. These include developing self-driving delivery vans with US autonomous driving startup Wayve.
Only time will tell if these spending initiatives pay off. And it looks to me as if the market’s starting to lose patience with the group. Not only is it still spending heavily, but it’s also facing lawsuits in the US over its technology.
Meanwhile, here in the UK, a series of fires at its automated warehouses have delayed online food orders and ignited some discussion over the safety of its robotic technology.
The outlook for Ocado shares
Ocado has always been a ‘jam tomorrow’ type business. Over the past decade, the company has continually lost money. Heavy investments in its automated facilities have cost significant sums.
Nevertheless, the company’s now starting to see the results. Even though it’s not earning a profit, Ocado is gaining market share. That’s why I’d look past short-term headwinds and focus on the company’s long-term potential.
The demand for automated fulfilment centres is growing, and Ocado is a leader in the space. It faces some teething problems, but it’s still early days for the technology. Over the next five to 10 years, engineers should be able to iron out the kinks.
Therefore, I’d buy Ocado shares for my portfolio today as a speculative growth investment. I think the company has tremendous potential, but I’d like to see some profits before building a full position.
Based on this conclusion, if I already held the stock, I’d continue to hold after the recent declines.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.