A crash is commonly defined as a loss of 20% or more in a short period of time. While some investors are fretting about the potential for a wider stock market crash, Ocado (LSE: OCDO) has had its own one. The Ocado share price fell 22% in a single day yesterday (18 November).
That sort of fall is unusual. However, it adds to longer term concerns for Ocado shareholders. The share price has tumbled 46% since the turn of the year – and a staggering 93% in five years.
However, the FTSE 250 share has a sizeable business and ongoing growth plans.
So, might this be a bargain buying opportunity for my portfolio?
A potentially big setback
Yesterday’s crash came as no surprise for those watching the business.
Back in September, US retail giant and Ocado customer Kroger announced that it was undertaking a detailed review of its automated order fulfilment network.
Kroger announced this week that it plans to close three distribution centres that it had set up as part of its partnership with Ocado. Kroger and Ocado will continue to operate five such centres in the US.
What is going on?
Kroger is getting deeper into partnership with Instacart and DoorDash. It reckons closing the three centres operated as part of its Ocado partnership can help it optimise its fulfilment network. It said that the automated fulfilment network has not met financial expectations.
Taken together, Kroger reckons the changes will improve its e-commerce operating profit by around $400m next year.
A serious credibility challenge
Ouch. This is a potentially huge blow for Ocado, in my view.
Rather than bouncing back, I see a case for the Ocado share price to drift even lower in coming months.
Kroger is a massive, savvy retailer. Its status as a client has given Ocado significant credibility as it aims to roll out its digital retail solutions more widely.
Not only is there the risk that Kroger may later decide to cut back even further on its Ocado partnership (or even ditch it altogether, although for now it has not mentioned such a possibility).
There is also a question mark about whether Ocado’s offering is as compelling as previously thought, given that Kroger has partly thrown in the towel and reckons doing so will help it save money over time.
It may be cheap, or a value trap
Seen positively though, Kroger is basically focusing on high-density areas with lots of customers for fulfilment centres, while servicing quieter areas through third parties like Instacart.
That may point the way for Ocado to hone its own focus over time, helping clients including Kroger get the most out of its offering.
The FTSE 250 firm does have deep experience and a sizeable customer base. I see both as competitive advantages.
Ocado has its work cut out for it now. I think it needs to adapt, fast.
If it does, it could yet turn an apparent setback into something that helps its business over the long term. Today’s Ocado share price might come to be seen as a long-term bargain.
But with so much still to prove and it continuing to burn cash, it may instead turn out to be a value trap.
For now I will not touch the share with a bargepole.
