JPMorgan lowers Ocado stock price target to GBP3.56 on Kroger concerns

JPMorgan has reduced its price target on Ocado (LON:OCDO) to GBP3.56 from GBP4.37, while maintaining an Overweight rating, due to concerns over its Kroger partnership and the assumption of three Customer Fulfillment Center exits. This adjustment resulted in a 14-unit reduction in JPMorgan's 2027 module forecast and a 7% cut in 2026/2027 EBITDA estimates, potentially jeopardizing Ocado's positive free cash flow guidance for FY2027. Despite the revised outlook and a 34% stock decline over the past year, JPMorgan believes the current pipeline supports the new target, with InvestingPro data suggesting the stock is currently undervalued.

Analysis

JPMorgan has revised its outlook on Ocado (LON:OCDO), reducing the price target to 356 pence from 437 pence while paradoxically maintaining an Overweight rating. The catalyst for this revision is the perceived risk to Ocado's partnership with Kroger, prompted by the latter's strategic shift toward rapid delivery. JPMorgan now models the exit of three of the ten Customer Fulfillment Centers (CFCs), which directly impacts forward estimates, lowering the 2027 module forecast by 14 units and cutting 2026-2027 EBITDA projections by 7%. This downgrade places Ocado's management guidance for achieving positive free cash flow by fiscal year 2027 in jeopardy. Despite the stock trading near a 52-week low after a 34% annual decline, the company exhibits strong near-term liquidity with a current ratio of 2.09. However, a significant refinancing of approximately £1,080 million is anticipated from 2028 onward, presenting a long-term credit risk. JPMorgan's retained Overweight rating is predicated on the belief that the current pipeline, even with no further module sales, supports the new, lower valuation, a view complemented by InvestingPro data suggesting the stock is undervalued but highly volatile with a beta of 2.0.

Key Decisions for Investors

• Investors should closely monitor any further announcements regarding the Kroger partnership, as the current downgrade is based on an assumption of three CFC exits, and a full termination would significantly alter the investment thesis.
• Given the stock's 34% decline and potential undervaluation, value-focused investors may find the current level an attractive entry point, but must tolerate high volatility as indicated by the 2.0 beta.
• It is critical to scrutinize management's future commentary on its ability to meet the positive free cash flow target for FY2027, as analyst estimates now cast doubt on this guidance.
• Despite the price target reduction, JPMorgan's maintained 'Overweight' rating suggests a potential floor on valuation, which may provide some support for investors with a long-term horizon who are willing to weather near-term partnership uncertainty.