- Ocado shares are down almost 90% from their lockdown-driven peak
- Morningstar thinks markets are under-pricing potential online grocery growth
Analysts at Morningstar believe online grocer Ocado is worth almost three times the value its current share price suggests.
It thinks markets are currently under-pricing the potential of the group’s technology, as well as long-term online grocery market growth, which Morningstar forecasts will multiply over the coming decade.
Ocado shares are down almost 90 per cent from their lockdown-driven peak of 2,817p in September 2020, amid concerns about its joint venture with Marks & Spencer and delays to the rollout of its robotic warehouse tech to global third-party retailers.
Ocado investors were handed a boost on Wednesday after the firm posted narrower losses
The shares were handed a double-digit boost this week after Ocado posted narrowed losses and raised guidance for the robotic warehouse arm, as boss Tim Steiner urged investors to keep faith in the firm’s strategy.
Currently trading at 356.3p, Morningstar has backed Steiner’s strategy with an Ocado target price of 920p.
Morningstar European equity strategist Michael Field said: ‘Some investors might expect that shares are up with events after a near 15 per cent move in the share price, but we believe there is far more to come with this story.’
The rating is a shot of confidence for Ocado shortly after it lost the support of brokers at Bernstein, which had been considered the ‘last bull’ on the group’s shares.
The investment bank cut its rating from ‘outperform’ to ‘underperform’ and slashed its target price from 1000p to 260p.
‘The jam tomorrow story is now less jam, more tomorrow,’ the analysts said, warning the next three years could be tough for Ocado, with online sales failing to bounce back after the pandemic, automated warehouses struggling to meet expectations and partnerships with retailers proving tricky.
It added: ‘We wonder if the cultural fit of a high-performing tech business like Ocado works well with slow-moving, traditional grocers.’
![Ocado is among the most shorted stocks in the UK market](https://i.dailymail.co.uk/1s/2024/07/17/15/87449003-13643729-Ocado_is_among_the_most_shorted_stocks_in_the_UK_market-a-36_1721226550613.jpg)
Ocado is among the most shorted stocks in the UK market
Bernstein now wonders if the public market is the ‘right place for Ocado’. It said the best option was Ocado being bought by the US retailer Kroger.
Ocado is the third most-shorted stock in the UK market, according to regulatory data, with investors holding 7.1 per cent of its shares betting against the firm.
But Morningstar thinks Ocado’s fair value is much higher given the long-term potential growth of online sales as a proportion of the wider online grocery market, which it forecasts will reach 25 per cent by 2040.
Online sales made up 13.1 per cent of total UK grocery market share last year, according to research agency Mintel.
Morningstar’s Field said this would generate ‘strong growth for both Ocado’s retail and technology solutions businesses’, with the group’s share of the online market growing to 8 to 10 per cent.
He told This is Money: ‘The assumptions on most of the revenues and profits we’re talking about here are coming way into the future.
‘The market currently thinks the tech solutions business will grow at around 15 to 20 per cent [per annum], depending on how bullish the analysts are, but we think it’ll grow 25 per cent.
‘That doesn’t sound like there’s a whole lot of difference but a 10 per cent differential in growth… over such a long period just completely changes the picture.’
Online sales made up 13.1 per cent of total UK grocery market share last year, according to research agency Mintel.
Field added that Ocado shares’ 2020 and 2021 peaks were driven by market estimates suggesting online share of the grocery market would reach 80 per cent and remain at those levels, which seems ‘almost fanciful’ compared to current estimates.
He added: ‘Some think market share will be relatively de minimis, even out to 2040, which also seems quite wrong to us – it doesn’t make a whole lot of sense that nobody is going to be using online and it doesn’t make a whole lot of sense that 80 per cent of people are going to be using online.
‘But Ocado is still going to be a leader in technology solutions, it’s still going to be developing technology that people want when they’re trying to automate fulfilment and infrastructure, for example, and it’s going to remain the leader in that field as well.
‘Ocado has been able to generate significant revenues and significant revenue growth in that industry over the last few years.’
![Ocado shares have fallen heavily since their peak and remain volatile](https://i.dailymail.co.uk/1s/2024/07/17/15/87448995-13643729-image-a-78_1721224866000.jpg)
Ocado shares have fallen heavily since their peak and remain volatile
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