HSBC cuts back on Ocado, downgrades to 'reduce'

Analysts at HSBC bumped up their target price for shares of Ocado even as they downgraded their recommendation for them, arguing that the company's pivot to a technology provider had only shifted the risk of the Home Delivery model floundering onto the shoulders of its customers.

And their own analysis of the mass market economics underpinning Home Delivery pointed to just that happening.

"However, it has not changed the fundamental economics of Grocery Home Delivery, which we believe are challenged. It has simply pushed this back as investors will now wait for Ocado’s customers to determine whether the model works or not. Our analysis suggests not," they said.

On the back of their analysis, HSBC judged that Ocado would need to open another 40 customer fulfillment centres, on top of the 25 it was already committed to, in order to justify its shares then current price.

"Longer term, we believe Ocado will only succeed if it can enable its customers to succeed too and we believe there is risk here given the challenging economics of Grocery Home Delivery," HSBC added.

HSBC upped its target price from 750p to 900p while downgrading its recommendation to 'reduce', explaining that the former lay in the middle of is mid and optimistic scenarios, rested on the assumption that existing agreements would be a success and that between five to seven CFCs would be added.

As of 1301 BST, shares of Ocado were trading lower by 2.33% to 1,401.50p.