Why Ocado soared 12% higher in the FTSE 100 today
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I have been contemplating whether adding Ocado (LSE: OCDO) stock, which is part of the FTSE 100, to my investment portfolio is a good idea for approximately one month now. Hence, it has been challenging to witness the significant surge in its value while I am still hesitating.
The stock value experienced a significant drop to its lowest point in half a decade at 343p on June 5th. Presently, on July 24th, it stands at 770p following a remarkable surge of 12%. This translates to a remarkable increase of 124% within a mere span of seven weeks.
Is it a good idea to purchase this growth stock following its recent impressive surge? Let's examine it.
Ocado Stock Surges 12%
Shares in Ocado surged by 12% today following the news of an agreement between the British online grocery provider and the Norwegian robotics company AutoStore. Under this deal, AutoStore will pay Ocado a total of £200m, split into 24 equal monthly payments.
This concerns a legal fight lasting for three years between the two corporations regarding a disagreement regarding ownership of innovative technology in the robotics field.
Ocado's automated warehouse bots independently assemble customers' online grocery orders. AutoStore alleged that their technology violated six of their patents.
It is important to mention that there was a significant amount of people betting against Ocado shares not too long ago. Therefore, it is possible that we have recently observed a situation where these short sellers were forced to quickly buy back the stock, causing the share price to surge in order to secure their profits or minimize their losses.
Two Businesses, One Story
Ocado runs two primary enterprises. It has established a collaborative retail partnership in the UK with Marks & Spencer, but it has not been very impressive thus far. This is particularly evident as the amount of items purchased by customers has decreased since the pandemic, causing a significant increase in inflation.
Furthermore, there is also the rapidly expanding Solutions department, which constructs automated storage facilities worldwide in collaboration with prominent international supermarkets. These esteemed partners consist of Coles Group in Australia, Lotte Shopping in South Korea, and Kroger in the United States.
The company made an announcement on July 10th, revealing that its initial automated warehouse in Asia, constructed for its Japanese associate Aeon, is now operational. This collaboration is intriguing since Japan is highly proficient in cutting-edge robotics.
I think Aeon's choice to team up and grow alongside Ocado is a genuine validation of its technology. This insight makes me lean towards the belief that the Solutions division holds the majority of the company's lasting worth.
Currently, there are 23 of these state-of-the-art automated warehouses functioning, and the intention is to introduce many more in the future.
However, the initial investment required to construct these fulfillment centers is substantial. Furthermore, Ocado incurred a pre-tax deficit of £501m in the previous year, indicating the possibility of the company constantly losing money as it expands.
Nevertheless, once erected, these storage facilities do offer a dependable and noticeable steady income. Additionally, they boast a predicted EBITDA margin of approximately 70% in the long run.
One current issue I'm facing is that a majority of the stocks that I have invested in for their potential growth have performed exceptionally well this year.
The stock prices of Nvidia and Tesla have skyrocketed by 203% and 111% correspondingly. In the meantime, Shopify and The Trade Desk have experienced a substantial increase of 89% and 88% respectively.
This has greatly unbalanced my portfolio towards growth stocks. If I were to invest in Ocado shares as well, and growth investing suddenly lost popularity as it did last year, my portfolio could endure significant setbacks.
However, in spite of the firm's current absence of profitability, I have made the decision to invest in the stock. The company operates in a massive global industry valued in the trillions, and its technology is at the forefront worldwide.
As per usual, my intention is to retain my investments for an extended period.
