In the past 12 months, Ocado (LSE:OCDO) is the worst performing constituent in the FTSE 100 index, with the share price crashing by just over 40% at the time of writing. Here’s why I’m considering this as a buying opportunity.
This is not any grocer…
Ocado Retail is the fastest-growing grocer in the UK market. Sales grew by a whopping 35% in 2020. In September, M&S not only partnered with Ocado Retail but now holds a 50% stake. The growth of the online supermarket is not just on the shoulders of Ocado but is also now key to M&S’s growth plans, and the two companies will work together to promote and grow the business.
Can Ocado maintain its sales and customer acquisition growth? Lockdown restrictions have eased, causing demand for online grocery shopping to slow, while there are various supply chain concerns including a July fire at Ocado’s Erith warehouse, which caused severe disruptions, delays and frustrated customers.
I believe, however, that the main driver of the FTSE 100 stock’s growth has little to do with the online ecommerce website.
The Ocado Smart Platform (OSP)
The OSP enables partners to develop scalable and profitable online grocery businesses through innovative robotic solutions and automated Customer Fulfilment Centres (CFCs). Ocado is developing the warehouses of the future, with the potential to expand beyond the grocery sector.
Ocado Retail is using the Ocado Group’s CFC meaning that the more the online supermarket grows, the more Ocado Group receives in fees. It also has relationships with 10 grocery businesses across four continents, including Kroger, the second biggest grocer in the US by market share.
The OSP has been responsible for Ocado’s share price decline in 2021 as a collision between three robots sparked the aforementioned major fire at Ocado’s Erith CFC. While future similar events causing disruptions do not concern me over the long term, the competitors in the space do, most notably Amazon. So what can give the FTSE 100 company the edge?
The farming of the future
With rapid population growth rates, climate change and declining arable land, farming needs to evolve and modernise to remain sustainable for future generations. Ocado Group recognises this and isbetting on vertical farms as a potentially lucrative solution. It has made a number of investments including acquiring a 58% stake in Jones Food Company who are Europe’s largest operating vertical farm.
Vertical farming can optimise plant growth plus reduce water use, and Ocado plans to locate them within or next to its CFCs. It sees a future where the freshest, most sustainable produce can be delivered to a customer’s kitchen within an hour of being picked.
Vertical farming remains significantly more expensive than traditional farming, but it’s clear that a solution is needed to avoid a food crisis, and this could revolutionise the way we grow and buy food.
This is a long-term growth play
Short-term problems have caused the crash in its share price but the FTSE 100 constituent is looking to change the way the world shops, for good and for better. Like with any growth stock, I brace myself for short- to mid-term volatility but I believe in the company’s growth potential. Ocado has long been on my watchlist but following the sharp decline in the share price over the last 12 months, I see this as a buying opportunity for my portfolio today.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Nathan Marks has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.