The technology behind start-up grocery firm Ocado (LSE: OCDO) might be the most futuristic thing I’ve ever seen. So I fell into a state of disbelief just this week when the share price of this growth stock dipped below 426p.
That’s an 84% drop from its peak, the company is the biggest faller on the FTSE 100 in the last three years, and I could pick up six shares for the price of what one cost in 2020.
Let’s look at why that share price cratered, and why I think it’s a no-brainer buy for me at this price.
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Like something from a sci-fi film
The really exciting thing about Ocado is its futuristic warehouses that bag groceries using a combination of advanced robotics, AI and algorithms.
These little robots can fill a customer’s grocery order all by themselves. Seeing it in action, I was reminded of a sci-fi film. And this British firm invented the tech, so no other company can use it unless they pay for a licence.
It’s easy to get excited about the potential of revolutionary new tech, and early investors in disruptive businesses like Tesla, Netflix, and Uber have walked away with bulging bank accounts.
Industries don’t get much bigger than everyday groceries, estimated to be $11trn worldwide. Ocado’s share price exploded in the 2010s, shooting up a stunning 4,000% in only eight years.
The peak came in 2020 on the back of an announcement of a joint partnership with Marks and Spencer. At that time, Ocado had a larger valuation than Tesco despite not having a single store!
But at some point, growth-focused tech companies have to start justifying high valuations by making real money. And this is where the issues for Ocado lie.
Losing £23 per order
Ocado has never turned a profit. The firm is down £1.5bn in total and loses money on every online delivery it makes. As the Financial Times put it: “The company has effectively been paying approximately £23 per order for its customers not to go to the shops.”
A lack of earnings is a problem here, but one that falls in the realm of normality for growth companies. Amazon, Facebook (now Meta), and Netflix were all criticised for a lack of earnings before they went on to make many billions – and enjoyed massive gains in their share prices.
And with £1bn still on the balance sheet, Ocado’s CEO expects things to keep ticking over for another four to six years, by which time he expects it to be “cash flow positive”.
Deals around the world
While Ocado has an online delivery service in the UK, I think the potential here is selling its technology around the world. It’s already happening, and leading grocers from the US, Canada and South Korea have already signed deals with the firm.
Growth stocks in tech are unpredictable, but in a way, that’s good. On the minus side, I could lose all of my investment. But my gains could be huge if the stock explodes. The chance of a big win is why I think Ocado stock at this price is a no-brainer buy for me. I’ll be buying some of the shares soon.
