This year, the Ocado (LSE: OCDO) share price has surged ahead of the broader market as demand for the company’s services has exploded.
The lockdown imposed to try and contain the spread of coronavirus forced many people across the UK to change their shopping habits.
Ocado, with its robotic warehouses, was by far the biggest beneficiary of this shift. Demand for the company’s services increased so quickly, it had to stop taking on new customers in March and April.
Ocado share price and demand
The rising Ocado share price reflects the growing demand for its grocery delivery service.
Initial figures show that grocery sales surged 18.9% across Britain in the four weeks to June 14. Total online sales jumped nearly 100% year-on-year. And according to data collection agency Kantar, Ocado was the sector’s standout performer. According to the agency’s figures, over the 12 weeks to June 14, Ocado’s sales rose 42.2%!
Ocado is far more than an online retailer. The company also licenses its technology for robotic warehouses around the world to other retailers.
This side of the business has been slow to get off the ground. While the company has signed several agreements, Ocado will only get paid once its technology is up and running.
The good news is, the pandemic should accelerate demand for the company’s technology. Organisations with highly automated production lines, like Ocado, were able to keep going throughout the crisis. This may lead to other retailers re-thinking their approach to automation and investing more to streamline their process.
That would be great news for the Ocado share price. If the company can grow its international footprint, it should be able to attract new investors around the world. This would help push the stock higher as investors buy into this high-tech growth story.
Reduced risk
Buying tech stocks is usually a high-risk activity. However, with Ocado, the risk is somewhat mitigated by the company’s existing international footprint.
What’s more, the firm’s established footprint in the grocery market here in the UK provides a steady stream of cash to help support its international expansion. This helps reduce the overall risk associated with the investment.
Unlike other FTSE 100 stocks, the Ocado share price may also see higher demand if there is a second wave of coronavirus. If the government has to re-impose the lockdown to contain such a second wave, demand for online grocery deliveries may return to the record levels seen in March and April.
For Ocado, which has spent the past few weeks boosting the size of its delivery network to meet increased demand, this may lead to record sales activity. Another outbreak may also lead to an uptick in demand for technology as other businesses rush to adapt to the new normal.
Therefore, buying Ocado shares today may be a sensible investment decision for buy-and-hold investors with a long-term outlook.