At times Ocado has looked like it could be Britain’s next big tech sensation AND its biggest flop.
Supporters have long championed its leading technology as the antidote to Amazon’s impending domination of the online grocery sector.
Critics, and there were many, decried the pace at which Ocado sold its high-tech robot warehouses to supermarkets.
But since a series of bumper deals to build its robotic warehouses around the world Ocado shares have soared 92 per cent in little over a month to £10.49.
Since a series of bumper deals to build its robotic warehouses around the world Ocado shares have soared 92 per cent in little over a month to £10.49
The brokers with egg on their faces include Bruno Monteyne at Bernstein, who in February this year said: ‘Reasons to be negative on the retail business are as strong as ever,’ before shares hit £2.45.
In May analysts Redburn listed the stock as a sell at £5.67 and said: ‘We remain unconvinced by the economics of the deals being signed.’ This followed a note last November which said the firm was a ‘sell’ at £2.87.
Until a couple of months ago, UBS predicted Ocado’s shares would max out at 280p and HSBC gave Ocado a target price of 260p. In May Credit Suisse said the target price was £5.40.
And famously, retail analyst Philip Dorgan said: ‘Ocado starts with an “o”, ends with an “o” and is worth zero.’
Launched as an online grocery delivery service in 2000, Ocado has morphed into a technology firm whose business model relies on building highly advanced automated warehouses for overseas supermarkets.
It was a lack of deals – and sluggish results – that caused seeds of doubt to form in analysts’ minds. But then the deals started coming in thick and fast.
In the past eight months, Ocado has signed deals with Sobeys, Canada’s second largest food retailer; ICA, Sweden’s biggest supermarket chain; and Groupe Casino, a leading French retailer.
Then came the big one in June, when Ocado signed up US grocery giant Kroger, which achieved £91bn of sales last year.
Until a couple of months ago, UBS predicted Ocado’s shares would max out at 280p and HSBC gave Ocado a target price of 260p. In May Credit Suisse said the target price was £5.40
David McCarthy, head of retail research at HSBC, called the deal a ‘game changer’. So the only question now is how high can Ocado shares go? Such was the magnitude of the Kroger deal that RBC Capital Markets raised Ocado’s target price from 475p to 750p within days of it being signed.
Morgan Stanley followed with a 325p boost to 870p while Bernstein hiked its price target by a whopping 1055p to 1300p.
Monteyne at Bernstein wrote this week: ‘I never thought I would ever write this note or do a double upgrade’ as he uprated Ocado to ‘outperform’ from ‘underperform’.
Analysts had miscalculated the demand for its service, which has almost certainly been boosted by Amazon’s attempts to dominate the grocery sector. Kroger had been tipped as a potential partner of Ocado for some time, but few predicted that a potential deal would be so valuable.
Monteyne freely admits he had forecast Ocado building between one and four of its high-tech warehouses for Kroger. Instead, Kroger asked for 20 in the first three years. But Laith Khalaf of broker Hargreaves Lansdown believes it is difficult to predict the size and scope of potential deals.
‘It was always going to be a tough one to call, but Ocado has made big progress in the past 12 months and it has caught some people out.’
So the big question on investors’ lips is: how far can Ocado go?
The online supermarket is somewhat limited in that it only signs exclusive deals abroad with retailers. That means it won’t target another retailer in the US, France, Canada or Sweden.
But its current deals alone are likely to boost Ocado’s earnings to £220million by 2023, say analysts.
And if it targets other rich nations where there is a demand for grocery deliveries, such as Germany, Japan and Australia, that number could rise dramatically.
Monteyne, a long-time critic turned convert, now believes Ocado’s shares have another £3 head room following the Kroger deal. ‘Consumers want grocery ecommerce,’ he added.