- JPMorgan analyst Marcus Diebel raised his Ocado price target from 290p to 460p, the highest tracked by Bloomberg and implying 45% upside, arguing current levels undervalue the company’s existing and already signed portfolio of modules. The shares rose as much as 7.2% to 340p, extending Monday’s 8.9% gain.
- The substantive change is financial rather than strategic. Diebel expects a de-risked pipeline of five new customer fulfilment centres and tight cost control to bring Ocado to breakeven on underlying free cash flow by the end of this year, with a solid balance sheet and no material refinancing needs for three years.
- That removes the question that has hung over the stock since the pandemic. A company no longer consuming cash, with no near-term refinancing, is a different proposition from one that was, and it explains a doubling from a 13-year low in mid-July better than any reassessment of the technology.
- Context matters on the recovery. Ocado peaked in September 2020 at a market value of £22 billion, fuelled by optimism about technology licensing and a surge in online grocery demand, so the doubling comes from a very low base.
What Happened?
Diebel said he continues to be excited about the investment case given ongoing momentum in the turnaround, that valuation looks attractive and strong growth drivers are in place. He expects upcoming capital markets days at partners Kroger and Marks and Spencer to underline retailers’ pivot toward online grocery.
Why It Matters?
The shift from valuing a market opportunity to valuing signed contracts is what makes this analysable. In 2020 Ocado was priced on an unbounded licensing opportunity, which is the kind of valuation that can be anything and therefore cannot be checked. Diebel’s argument is narrower and better: that the modules already signed and operating are worth more than the current share price, which is a claim about contracted revenue rather than addressable market. Investors burned by the first version of this story should note the difference, and it is the same distinction separating companies that have cleared recent IPO markets from those that have not. Reaching free cash flow breakeven is the event, and it is understated in the coverage relative to the price target. A business that stops burning cash no longer depends on capital markets remaining open to it, which in current conditions is worth a great deal. No material refinancing requirement for three years compounds that, particularly with sterling borrowing costs elevated and the UK 10-year gilt yielding 5.37%. The dependency worth understanding is that Ocado does not control its own growth. Revenue depends on partners building and filling fulfilment centres, which is why Diebel points to capital markets days at Kroger and Marks and Spencer as catalysts. A technology licensor’s results are set by its licensees’ capital expenditure decisions, and those are made for the licensees’ own reasons. On the target itself, a street-high figure 45% above a stock that has already doubled in three months is an opinion rather than evidence, and such targets commonly follow large moves rather than predicting them.
What Next?
Confirmation of free cash flow breakeven by year end is the milestone that validates the turnaround, and it is testable. The Kroger and Marks and Spencer capital markets days will show whether partners are committing to more capacity, which determines Ocado’s growth. Watch the pace at which the five pipeline centres come online. For investors the question is whether the business is now valued on signed contracts or is again being priced on possibility.
Affected Tickers and Coins: OCDO, MKS, KR
Source: Bloomberg
