Ocado (LON:OCDO) share price has pared back most of the gains it made earlier this year as acquisition hopes dry. The stock, which peaked at 1,018p in July, has crashed by almost 50% to the current 550p. It has lagged that of other British retailers like Tesco (LON:TSCO) and Marks and Spencer (LON:MKS) which have jumped by 20% and 85% this year.
Ocado’s gloomy outlook
Ocado Group , one of the biggest UK retail stocks, is going through major headwinds as growth in its key markets slows. The most recent results revealed that the company’s retail revenue rose by 7.2% in the third quarter to £569.6 million.
Its closely watched metrics also improved during the quarter. Average orders per week rose to 381k while the number of active customers rose from 946k to 961k. The average basket value rose from £115 to £120.72 as prices of most items jumped.
Ocado left its guidance for the year intact. It expects to have mid-single-digit growth, helped by strong volume growth and intensified partnership with Marks and Spencer.
There are two main reasons why Ocado share price has dropped recently. First, hopes that the company will be acquired have diminished in the past few months. As I wrote a few months ago, there were rumours that companies like Amazon (NASDAQ:AMZN) were considering placing a bid for the company.
Such a deal would have looked at Ocado’s valuation, which stands at about 4.3 billion pounds, lower than its peak of over 10 billion. Also, the company has a growing market share in the retail sector, thanks to its partnerships with several retailers like Kroger (NYSE:KR), Coles, and Morrisons.
However, a potential acquirer would be concerned about Ocado’s track record of loss-making and slow growth. Ocado has lost billions of pounds in the past decade as it boosted its investments in its warehouse solutions.
Further, Ocado share price has struggled because of challenges by its customers. For example, in France, Casino has averted bankruptcy following a rescue package by Daniel Kretinsky, who also has a stake in Royal Mail (LON:IDSI).
In Sweden, ICA closed its e-commerce warehouse as it changed its strategy. While the closure did not affect Ocado’s warehouse, it is a sign that the company is not doing well.
Further, Ocado is struggling because of the weak fundamentals of the UK’s retail sector. The ongoing cost of living crisis has led to weak consumer spending.
Ocado share price forecast
Turning to the daily chart, we see that the OCDO share price formed what looks like a double-top pattern at about 942.2p. This pattern is usually a bearish sign. The stock has also formed a death cross, which happens when the 50-day and 200-day Exponential Moving Averages (EMA) make a bearish crossover.
Therefore, the outlook for the Ocado stock price is bearish. A bearish breakout will see it drop to the next key support at 380.9p, which is about 27% below the current level.
This article first appeared on Invezz.com
