The Ocado (LSE:OCDO) share price has been on fire this past year. With the pandemic forcing most people to stay at home, the online-supermarket stock enjoyed a significant business boost.
But over the past few weeks, the share price has begun to decline. Why? And is this a potential buying opportunity for my growth portfolio? Let’s take a look.
Why did the Ocado share price fall?
The business published its full-year 2020 results in early February and I think the company is performing quite well. Total revenue increased by 32.7%, primarily due to UK operational growth. And its International Solutions segment looks like it’s taking off with revenue rising from £0.5m to £16.6m.
The firm remains unprofitable, but its losses also declined from £214.5m in 2019 to £44.1m in 2020. So why is the Ocado share price falling?
As I see it, investors are being more cautious due to two factors. The first is the potential introduction of a digital sales tax. The second is the expectation of a slowdown in online sales growth as more of the population gets vaccinated against Covid-19. Personally, I’m not overly concerned about either of these threats. And here’s why.
Ocado is building a robot army
As previously stated, the recent pullback in the Ocado share price is likely linked to its online supermarket segment. While that does currently generate the most significant portion of revenue, it’s no longer the primary focus of the business. But the stock pivoted in 2019, transforming into a technology-led software and robotics solutions company. So what does that mean?
Basically, it built a robot army to help automate the majority of the process of producing, packaging and delivering groceries to retailers worldwide. Today, over 10 supermarket chains — including Morrisons, Coles, and Kroger — have signed up to use its robot-driven platform.
What I find particularly promising is the prospect of a network effect forming. As more companies join the platform, its resources grow. This subsequently enables faster innovation to improve efficiency, which in turn attracts more companies to sign up.
There are many challenges ahead
While the robot-driven platform is vastly different from the home delivery of food, it still serves the same market – groceries. This means that the regulatory requirements for producing and packaging food must be maintained. This is a task made even more complicated by its international operations as the rules vary from country to country.
Any delays or disruptions in the supply chain would likely damage Ocado’s reputation as well as the relationships with its platform customers. Even more so if the cause is a regulatory breach.
Another significant risk that may lead to operational disruption is the workforce itself. The majority of Ocado’s employees are EU nationals (for now). This adds additional complications as the UK is no longer a member of the EU. Thus most workers will have to acquire visas. While this is only a short-term problem, it could lead to the potential loss of key personnel.
Would I buy Ocado at the current share price?
There are certainly plenty of risks ahead, but the business is trying to redesign supermarkets’ grocery supply chains. If it succeeds, robots could become the new standard way of doing business for all grocery stores. Personally, I think the risks are worth the reward and so Ocado looks like it could be a fine addition to my portfolio.
