JPMorgan lifts Ocado stock rating to Overweight, target to £4.00

On Wednesday, JPMorgan analyst Marcus Diebel upgraded Ocado Group (LON:OCDO) PLC, a British online supermarket with a market capitalization of $2.66 billion, from Neutral to Overweight and raised the price target to £4.00 from the previous £3.40. This shift in stance comes after a period of maintaining a Neutral or Underweight rating on the company since 2018. According to InvestingPro analysis, the stock appears undervalued at its current price of $2.97, trading significantly below its Fair Value estimate.

Diebel’s optimism is fueled by a reevaluation of Ocado’s investment case, noting several reasons for a positive outlook. The company has demonstrated solid performance with 8.24% revenue growth in the last twelve months, despite challenging market conditions. The analyst points out that previous concerns have begun to fade, particularly highlighting the potential for new deals in Ocado’s Solutions operations. The analyst’s research into the global eGrocery space suggests an increased likelihood of such developments.

The analysis indicates that the slow adoption of online grocery shopping has not been due to a lack of consumer demand, as strong customer reviews demonstrate, but rather to supply constraints. Traditional supermarkets have been cautious about running online and offline channels in tandem, focusing on protecting margins and using less efficient store-picking solutions for online sales. Diebel argues that this strategy may be short-sighted because, as online sales increase, the high costs associated with store-picking solutions will become unsustainable.

Further supporting the upgrade, Diebel observes that Ocado’s margins are improving rapidly in both its Retail and Solutions segments, though InvestingPro data shows current gross profit margins at 10.49%. This improvement is expected to lead to positive free cash flow (FCF) generation by the end of 2026. Such financial performance would enable Ocado to refinance approximately £500 million in Convertible Bonds due in 2025 and 2026. The company maintains a healthy current ratio of 1.88, indicating strong ability to meet short-term obligations.

In addition, the analyst notes that online-only supermarkets in Europe and players like Walmart (NYSE:WMT) in the United States are gaining market share. This trend is pressuring more traditional supermarkets to seek scalable solutions, such as those offered by Ocado, to maintain competitiveness in the evolving market landscape.

JPMorgan’s upgraded rating and price target reflect a renewed confidence in Ocado’s growth prospects and financial trajectory, as the company navigates the expanding online grocery sector. With analysts forecasting 1.85% revenue growth for the coming year and a beta of 1.87 indicating higher volatility, investors seeking detailed analysis can access additional insights and 12 more exclusive ProTips through InvestingPro.

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