Why Ocado jumped 12% higher on the FTSE 100 today
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For about a month, I’ve been contemplating whether FTSE 100 Ocado (LSE:OCDO) stock deserves a place in my portfolio. So it’s hard to see it really skyrocket while I’m digging.
The share price hit a five-year low of 343p on June 5. Today, on July 24th, it is at 770p after a 12% jump. That’s an astounding 124% increase in just seven weeks.
Should I buy this growth stock after its recent incredible run? Let’s see.
Why Ocado stock is up 12%
Ocado shares rose 12% today after it was announced that Norwegian robotics company AutoStore will pay the UK online grocer £200 million in 24 monthly installments.
This relates to a three-year legal battle between the two companies over intellectual property disputes related to robotics technology.
Ocado’s warehouse robot autonomously packs online grocery orders for customers. AutoStore claims its technology infringes on six of its patents.
I should note that Ocado’s stock was very short just a few months ago. So we may have recently witnessed a short squeeze, which accelerated share prices as short sellers bought back shares to crystallize their profits or cut their losses.
A tale of two businesses
Ocado operates two main businesses. It has a UK retail partnership with Marks & Spencer, which has been underwhelming so far. This is especially true as the size of the customer basket has decreased since Covid and inflation has subsequently increased sharply.
Second, there is the fast-growing Solutions division which is building robot warehouses around the world with leading global wholesalers. These partners include Coles Group in Australia, Lotte Shopping South Korea and Kroger in the US.
On July 10, the company announced that its first robotic warehouse in Asia — built for Japanese partner Aeon — was up and running. This partnership is exciting, as Japan is no slouch when it comes to advanced robotics.
So I think Aeon’s decision to partner and grow with Ocado is a huge support for the technology. And this leads me to believe that the Solutions division is where most of the company’s long-term value is located.
It now has 23 high-tech automated warehouses in operation, with plans to roll out dozens more.
But the up-front cost of setting up a fulfillment center is significant. And Ocado made a pre-tax loss of £501 million last year, so there’s a risk that the company continues to cash out indefinitely as it grows.
However, once built, these warehouses provide secure and visible recurring income. And they have a projected long-term EBITDA margin of about 70%.
My step now
One current ‘problem’ for me is that a lot of the growth stocks I hold have burned this year.
Nvidia and Tesla jumped 203% and 111%, respectively. Meanwhile, Shopify and The Trade Desk were up 89% and 88%.
It’s skewed my portfolio balance heavily towards growth stocks. If I also buy Ocado stock and growth investments suddenly fall out of favor as they did last year, my portfolio could suffer immensely.
Nevertheless, and despite the company’s current lack of profitability, I have decided to buy the stock. The company operates in a global industry measured in the trillions and its technology is world leading.
As always, I will aim to stick around for the long haul.
