The Ocado (LSE: OCDO) share price has plunged in early deals this morning. Shares in the retailer are trading down around 3% on the day, at the time of writing, a rare pullback for this FTSE 100 champion. Indeed, over the past 12 months, shares in the retailer/tech champion, have returned a staggering 125%. It was the second best performing stock in the UK’s blue-chip index last year.
As such, following today’s performance, I’ve decided to take a closer look at this business. The Ocado share price pullback could offer an excellent opportunity to buy this growth business at a discounted price.
Ocado share price pullback
The retailer published its full-year results today, which were full of good news. Earnings before interest, tax, depreciation and amortisation (EBITDA) were £73m, up nearly double from the year-ago figure of £43m. Group sales jumped by a third to £2.3bn.
Ocado is one of a handful of businesses to come into its own over the past 12 months. At one point, demand for the company’s services was so high, it had to close the door to new customers. Profit at Ocado Retail, the joint venture with Marks & Spencer, jumped from £40m to £148m.
And management is looking to capitalise on its growth last year in 2021. The group is planning to invest £700m over the year, building dozens of new automated fulfilment centres. This will significantly increase the retailer’s footprint. It currently manages three UK facilities that handle its retail joint venture.
Legal challenge
So, the retailer looks to be firing on all cylinders. But it faces challenges. According to today’s results release, higher project costs will hit the firm’s bottom line over the next 12 months.
What’s more, the group is currently fighting a legal battle with rival AutoStore. Management expects to incur “significantly higher” near-term legal costs in this fight. This seems to be the main reason for the Ocado share price weakness today.
High costs and technology challenges have always been a risk for the retailer. They’ll likely continue to be so. Despite rising profits as its retail division, analysts don’t expect the group to report an overall profit for several years as tech spending gobbles up retail income.
Then there’s also the battle with AutoStore to consider. The company has accused Ocado of infringing its patents and stealing technology. If these accusations turn out to be correct, it could significantly negatively impact the retailer’s outlook and future potential.
Overall, while I believe the Ocado share price looks like an attractive investment and current levels, I think the business faces several significant headwinds, making it difficult for me to get behind the company right now.
Therefore, I’m not a buyer of the stock right now. However, if Ocado’s legal issues are brought to a close, then I may revisit the business, as I’m incredibly excited about its potential to transform the grocery market with technology.
