Why Ocado Group Stock Is Skyrocketing Today

What happened

Ocado Group (LSE:OCDO.LN) stock is soaring in Thursday's trading thanks to speculation that the company could be acquired by Amazon. The U.K.-based online grocery business's share price was up 31.8% as of 3:30 p.m. ET, according to data from S&P Global Market Intelligence.

U.K. news outlet The Times published a report early today indicating that Ocado had emerged as a potential acquisition target. The report indicated that the business was attracting buyout interest from multiple American companies and noted Amazon as a potential suitor.

So what

In addition to running its own retail operations, Ocado also licenses grocery-delivery technologies to third parties. The company's still-compressed valuation and strong position in the U.K.'s online grocery market makes it a feasible buyout target. Even with today's explosive rally, the company's share price is still down roughly 6% in 2023 and 32.5% over the last year.

With rumblings that Ocado could be acquired, investors are pouring into the stock in hopes of profiting on a potential buyout. Shares could still have big upside at current prices, but there's no guarantee that Amazon or other suitors will step in for a purchase significantly above current pricing levels.

Now what

Investing in a company with the expectation that it will be acquired is risky. While Ocado could potentially be bought at a significant premium compared to today's valuation, it's also possible that no such deal will materialize.

After growing sales roughly 0.6% last year, Ocado is guiding for mid-single-digit sales growth this year. While it's likely that grocery shopping will increasingly be conducted through online channels, macroeconomic pressures suggest that near-term business performance could be relatively soft, and Ocado has been posting substantial losses lately.

On the heels of today's big stock pop, investors should treat investing in the company on hopes of a buyout as a high-risk, high-reward proposition.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool recommends Ocado Group Plc. The Motley Fool has a disclosure policy.