JPMorgan lifted its rating on Ocado (LON:OCDO) stock from Neutral to Overweight as it believes the company is now at an "inflection point." Shares surged as much as 15% in today’s London session in response to the news.
“After being either Neutral or Underweight on Ocado since 2018, we are revisiting the investment case and identify several reasons to be more optimistic, as many of our previous concerns are beginning to dissipate,” analyst Marcus Diebel said in a note.
Specifically, Diebel highlighted three reasons driving the upgrade. First, the analyst pointed to the potential for new deals in Ocado’s Solutions operations, driven by the increasing adoption of online grocery shopping.
The slow adoption rate in recent years was not due to a lack of demand but rather to supply constraints, as supermarkets focused on margin protection and used less efficient store-picking solutions for online sales.
But with the rise of online-only supermarkets in Europe and Walmart (NYSE:WMT)’s growing market share in the U.S., traditional supermarkets are seeking scalable solutions like those offered by Ocado.
Second, JPMorgan cited improving margins in Ocado’s Retail and Solutions divisions, which they expect will lead to positive free cash flow generation by the end of 2026. This “should allow the company to refinance about £500m in Convertible Bonds in 2025/26,” Diebel said.
Lastly, Diebel believes that the recent drop in Ocado’s share price presents an attractive entry point.
He thinks that the market is not fully valuing the 150 modules Ocado has guided for by 2027, of which 123 are already operational and 27 are under construction.
JPMorgan has set a price target of 400p for Ocado, factoring in an additional 29 modules from new signings beyond 2027, which they consider a conservative estimate.
The bank did caution that execution remains critical, and any further delays in Customer Fulfillment Center (CFC) ramp-ups could negatively impact the stock.
It referenced a short-term delay in the ramp-up for two CFCs for Kroger (NYSE:KR) in Charlotte and Phoenix, which management attributed to sourcing issues. However, JPMorgan’s optimistic outlook is based on the assumption that there will be no additional delays in the ramp-up pipeline through the end of 2027.
