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Investing.com -- Shares of UK-based Ocado Group Plc fell after Morgan Stanley cut its price target by 19% to 170p from 210p, maintaining an "underweight" rating and warning of “increased execution risk” in the online grocer’s automated warehouse business.
The brokerage’s bearish note cited growing uncertainty over Ocado’s relationship with Kroger, its largest U.S. client, and revised projections for the group’s customer fulfilment centre (CFC) network.
Morgan Stanley said Kroger’s recent moves signal that “it is pivoting toward the use of food delivery aggregators, namely Instacart, to service demand in a more asset-light fashion, focusing on sub-one-hour delivery.”
The brokerage now assumes Kroger will close two CFCs in fiscal 2026, potentially in Florida and Maryland, and that the remaining facilities will have shorter operating lives of around 15 years, down from 30 years previously assumed.
The revised base case cuts the total number of CFCs used in Ocado’s valuation from 36 to 30, with each valued at an estimated £54 million net present value.
Morgan Stanley expects Ocado to receive about £17 million in exit fees per closed CFC, adding roughly £34 million in revenue in fiscal 2026.
However, the report projects a 5% decline in group revenue in fiscal 2027 and an 8% year-on-year drop in adjusted EBITDA that year.
The investment bank estimates group revenue of £1.34 billion in fiscal 2025, rising to £1.45 billion in 2026 before slipping to £1.51 billion in 2027.
Adjusted EBITDA is forecast to increase from £177 million in 2025 to £253 million in 2026, then ease to £280 million in 2027. Net debt is expected to widen from £1.43 billion in 2024 to £1.63 billion in 2025.
Morgan Stanley also projects Ocado will remain free cash flow negative until 2029, later than the company’s own guidance for breakeven in the second half of 2026.
The brokerage noted, “the value and payback period of each CFC for Ocado and its customers remains unclear,” adding that “we see increased execution risk on the CFC pipeline over the long term.”
In its risk-reward framework, Morgan Stanley set a bull case of 610p per share, assuming faster contract wins and stronger profitability, and a bear case of 100p, assuming no new contracts and further client exits.
The base case valuation of 170p implies a total enterprise value of £2.47 billion, including £1.62 billion attributed to the Solutions business, £370 million to logistics, and £391 million to its retail joint venture with Marks & Spencer.
Ocado shares closed at 232p on Oct. 3, with a 52-week range of 411p to 217p, and a market capitalization of £1.9 billion.
The downgrade follows previous Morgan Stanley reports describing Ocado’s model as “still unproven” amid limited visibility on profitability.