2022 has been a pretty dire year for several FTSE 100 stocks. While the index has been relatively flat overall, some of its constituents haven’t been so lucky. And Ocado (LSE:OCDO), in particular, has been slammed into the ground with a 65% share price decline in the last 12 months. In fact, it’s one of the worst-performing stocks in the index so far this year.
While I don’t own any shares, I’ve been bullish on this business for the past few years. So is this a case where short-term problems are dragging down a potentially excellent company? Or is my theory broken? Let’s take a closer look at what’s going on.
What happened to this FTSE 100 stock?
The Ocado Smart Platform (OSP), its business-facing robotics warehouse automation solution, has been performing admirably. This part of the business was the primary focus of my investment idea and now has 11 industry-leading partners in nine counties worldwide, with 16 customer fulfilment centres on-line.
As per the latest interim results, revenue from the group’s international OSP has more than doubled. Meanwhile, fees generated from its UK Logistics operations grew by 8.9%.
As more companies seek to cut costs, the ability to automatically process and prepare customer orders is growing in demand. And based on the performance delivered so far, Ocado seems to be hitting the mark. So why is this FTSE 100 stock being sold off?
The problem lies with its retail division. Despite heavy investments into robotics, Ocado is still first-and-foremost an online grocery store. At least on a revenue basis. And since the height of the pandemic, growth has consistently failed to meet expectations.
After lockdowns were lifted, consumers began venturing back to brick & mortar stores. As such, the company lost its tailwinds and couldn’t hold onto all of its newly-secured market share. This downward trend in growth continued throughout 2021. And now, in 2022, with inflation driving up prices, customer spending is still falling.
The online store continues to attract new customers with a total of 946,000 active members. And this has driven the average weekly orders up. But with inflation placing pressure on spending, basket sizes have been dropping, causing revenue to decline. Pairing that with widening losses from rising costs, and the result is a massive drop in the Ocado share price.
To buy or not to buy?
As a platform, Ocado looks superb, in my opinion. The rising customer count on both sides of its operations proves it has something valuable to offer. And with more members joining its ecosystem in a post-pandemic world, it’s clear that this wasn’t just a Covid stock.
However, as a business, Ocado has a long way to go. The international OSP is making solid progress, in my mind. But it remains a tiny part of the overall operation, only contributing 4.6% of the revenue stream. And with rising dry ice and electricity costs, the path to profitability seems to be getting even longer.
In the long term, I continue to believe Ocado can become one of the best-performing FTSE 100 stocks. But a lot has to go right for this to become a reality. For now, I think it’s worth moving this stock back to my watchlist until a shorter path to positive earnings materialises.
