Close to a 52-week low, I would not contact this FTSE 100 inventory with a bargepole!

Loads of FTSE 100 shares are crimson scorching proper now. Having surpassed 8,400 factors, the index is usually reaching new all-time highs in 2024.

Nonetheless, Ocado (LSE:OCDO) is one FTSE 100 firm that isn’t becoming a member of the celebration. The web grocery enterprise has misplaced over half its worth since January and, sadly, I believe the downtrend would possibly proceed.

Right here’s why I’m steering away from Ocado shares.

Share value fall

The Ocado share value has been on a exceptional journey. In the course of the pandemic, it soared to file highs, propelled by a web based buying increase. At one level, shares have been altering palms above £28 — a far cry from at this time’s value a bit of above £3.50.

Investor confidence has since evaporated amid Ocado’s profitability struggles and incapacity to seize ample market share. As well as, the stability sheet doesn’t encourage confidence. Internet debt has virtually doubled to a whopping £1.07bn.

Past weak financials, I concern there are much more urgent dangers dealing with the corporate.

M&S dispute

One main purpose Ocado shares may stay depressed is the prospect of litigation with fellow FTSE 100 retailer Marks and Spencer.

5 years in the past, the corporations signed a deal to personal 50:50 stakes in Ocado Retail, a web based meals three way partnership. Beneath the contract, M&S initially paid £562m and is because of pay an extra £190m, based mostly on sure targets being met.

M&S plans to withhold the ultimate sum as a result of Ocado’s failed to fulfill these targets, prompting Ocado to threaten authorized motion.

The souring of relations is especially unlucky contemplating the enterprise is beginning to present indicators of enchancment. Ocado Retail’s gross sales elevated 7% to £2.4bn in FY23.

Whereas Ocado would possibly be capable to promote its retail arm to M&S this isn’t assured and the potential of a protracted dispute is an unwelcome headache.

Potential FTSE 100 relegation

One other potential headwind is Ocado’s doable demotion from the FTSE 100 to the FTSE 250.

The Ocado share value stoop means the corporate now has the second-smallest market cap within the Footsie, having dipped beneath £3bn.

If the enterprise loses its place in London’s premier index, this might adversely influence Ocado’s long-term share value trajectory.

There are experiences that the agency would possibly change to a US itemizing to spice up its valuation, however I’m sceptical this shall be a silver bullet for its basic efficiency woes — if it occurs in any respect.

A lot to show

Total, I really feel Ocado’s hopes relaxation on being valued as a fully-fledged tech inventory. That is what the corporate believes its USP is.

It describes itself as “a expertise enterprise redefining ecommerce, fulfilment and logistics in on-line grocery and past“.

Ocado’s expertise options have clear development potential. In any case, its end-to-end on-line grocery platform is a singular proposition available in the market.

The corporate’s proprietary expertise is protected by over 2,600 patents filed or granted, which helps to safe a aggressive benefit. Plus, additional funding in AI may result in effectivity enhancements throughout Ocado’s robotic workforce.

Nonetheless, though its expertise options division delivered a 44% income leap to £421m final yr, it nonetheless solely accounts for 11.5% of whole gross sales. That’s not sufficient but to justify a better valuation for my part.

Disappointing financials, no dividend funds, and potential authorized troubles make this inventory an unattractive funding for me.

I’m in search of different FTSE 100 shares to purchase as a substitute.