For about a month, I’ve been considering whether FTSE 100 stock Ocado (LSE: OCDO) warrants a place in my portfolio. So it’s been difficult to watch it absolutely rocketing while I’ve been digging in.
The share price hit a five-year low of 343p on 5 June. Today, on 24 July, it’s at 770p after jumping 12%. That’s an incredible 124% rise in just seven weeks.
Should I buy this growth stock after its recent remarkable rise? Let’s take a look.
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Why Ocado stock is up 12%
Ocado shares rose 12% today after it was announced that Norwegian robotics firm AutoStore will pay the British online grocer £200m in 24 monthly instalments.
This relates to a three-year legal battle between the two companies over an intellectual property dispute relating to robotics technology.
Ocado’s warehouse robots autonomously pack online grocery orders for customers. AutoStore had claimed its technology infringed six of its patents.
I should note that Ocado shares were heavily shorted only a few months ago. So we may have recently been witnessing a short squeeze, which accelerates a share price as short sellers repurchase the stock to crystalise their gains or cut losses.
A tale of two businesses
Ocado operates two main businesses. It has its retail UK partnership with Marks & Spencer, which so far has largely underwhelmed. This is especially true as customer basket sizes have decreased since Covid and inflation has subsequently risen sharply.
Second, though, there is the fast-growing Solutions division that builds robotic warehouses across the world with leading global grocers. These partners include Coles Group in Australia, South Korea’s Lotte Shopping, and Kroger in the US.
On 10 July, the firm announced that its first robotic warehouse in Asia — built for Japanese partner Aeon — was up and running. This partnership is interesting, as Japan is no slouch when it comes to advanced robotics.
So I find Aeon’s decision to partner and expand with Ocado a massive endorsement of its technology. And this leads me to believe that this Solutions division is where most of the company’s long-term value lies.
It now has 23 of these high-tech automated warehouses in operation, with plans to roll out dozens more.
But the upfront cost of building these fulfillment centres is significant. And Ocado made a pretax loss of £501m last year, so there’s a risk that the company continues to bleed cash indefinitely as it scales.
However, once built, these warehouses do provide secure and visible recurring revenue. And they have a long-term projected EBITDA margin of around 70%.
My move now
One present ‘problem’ for me is that many of the growth stocks I’m holding have been on fire this year.
Nvidia and Tesla have soared 203% and 111%, respectively. Meanwhile, Shopify and The Trade Desk are up a 89% and 88%.
This has heavily skewed the balance of my portfolio towards growth stocks. If I also bought Ocado shares and growth investing suddenly fell out of favour as it did last year, my portfolio could suffer badly.
Nevertheless, and despite the firm’s current lack of profitability, I’ve decided to buy the stock. The company is operating in a global industry measured in the trillions and its technology is world-leading.
As always, I’ll be aiming to hold for the long term.
