Is Ocado’s share price oversold after downgrade?

Optimism over the Ocado share price had been on the rise following positive signs of progress in the M&S joint venture. However, a recent analyst downgrade has applied downward pressure on the shares. The question now is: will the bulls or the bears win?

• Ocado’s share price fell 20% last Thursday after a downgrade from BNP Paribas Exane.
• Retail sales grew 7.2% in the third quarter thanks to discounting.
• Ocado’s stock up 22% in the past three months on takeover talks and end of long-running legal dispute with AutoStore.

Ocado’s [OCDO.L] share price fell over 20% last Thursday after BNP Paribas Exane analyst Andrew Glynn resumed his bearish stance on the stock. The analyst cited retail volumes, the stock’s valuation and the exit of the CEO of Ocado Solutions. In the summer, Glynn had upped his rating to ‘neutral’, arguing Ocado’s share price represented a balanced risk-reward ratio.

In last week’s downgrade, Glynn moved the online grocer back to ‘underperform’ and said the recent rally in Ocado’s share price had left it ‘out of kilter’. Glynn stuck to a 390p price target on Ocado which would deliver a substantial 40% downside on Monday’s close of 655p.

“Ocado has doubled since we moved to ‘neutral’ from ‘underperform’ in June, so having argued the risk-reward had become more balanced, it seems now to be out of kilter again ” wrote Glynn in a note to investors.

In another blow, Ocado announced the departure of Luke Jensen as executive director and CEO of Ocado Solutions. Ocado Solutions is responsible for building high-tech robotic warehouses for international clients. It has also been a drag on earnings in recent years. Current non-executive director John Martin has taken up Jensen’s role.

Exane’s Glynn said the retirement of Jensen did not point to an "over-flowing order book” for the Solutions business.

Ocado Retail sales up 7.2% in Q3

The downgrade poured cold water on what had been a positive week for Ocado’s retail business. On 19 September, Ocado Retail reported that its joint venture with Marks and Spencer [MKS.L] was showing signs of improvement, with average weekly orders and customer numbers up in its fiscal third quarter (Q3).

In the trading update, Ocado reported that retail sales were up 7.2% year-on-year in Q3 to £569.6m. Active customers grew 1.5% year-on-year to 961,000, while those who made a fifth shop on Ocado.com — so-called ‘mature’ customers — were up 6.6%. The average basket value was also up, even if the average basket size remained stable.

Ocado credited its sales growth to its ‘Perfect Execution Programme’ and August’s ‘Big Price Drop’ campaign that highlighted discounts and delivery times to customers. Ocado Retail CEO Hannah Gibson said that Ocado Retail’s revenue was growing faster in Q3 than in the first half of the year, and there had been a “return to positive volume growth in the last month of the quarter”.

Ocado share price forecasts

After the sharp decline Thursday, Ocado’s share price bounced back Friday to close the day 6.7% up. Monday this week saw another volatile day’s trading, with Ocado shares down 4.95%.

Still, Ocado’s share price has gained over 22% in the past three months — a strong performance on the FTSE 100, considering the stock was looking at getting booted off London’s leading index earlier in the year. Pushing the share price up has been speculation that Amazon [AMZN] might make a takeover bid and a favourable end to a patent infringement case with AutoStore[AUTO.OL].

Not everyone is as bearish as Exane’s Andrew Glynn on Ocado. Earlier last week, Jefferies had raised its price target from 550p to 750p and increased its profit margin forecasts for Ocado Retail to 7% to 8%. Among analysts, Ocado has a 12-month median price target of 715p, suggesting a 3.4% upside on Monday’s close.

Persuading more clients to sign up for its high-tech warehouse business could help make a stronger bull case, especially as losses on this side of the business have mounted. In 2022 Ocado Solutions business made a £113.2m pre-tax loss. The previous year it lost an eye-watering £119.3m. 

Following last week’s results AJ Bell Investment Director Russ Mould said that the joint venture with Marks and Spencer was not broken but simply “stuck in the mud” and that it needs to be “operating flawlessly” if it wants to persuade more grocers to use its solutions platform. Mould added that the more trading updates Ocado releases like last week’s, then “the better it looks in future client negotiations”.