Ocado shares jump but Goldman sees little upside

Shares in the online grocery fulfilment group were up 8.6% at 699.4p by 1013 GMT, despite Goldman cutting its target price from 900p to 700p and maintaining a 'neutral' rating.

The bank said it was now including Ocado's first non-food automated distribution deal in its forecasts, announced last with month with pharmaceutical distributor McKesson Canada. While the future potential for the non-food distribution market is large – particularly within retail, pharmacy and automotive – the deal currently only covers one site and equates to a value of 1.5p per share.

For the core grocery operations, Goldman has cut its forecast for the number of customer fulfilment centres (CFCs). "Given the increasing prevalence of quick delivery, click & collect, and third-party platforms, we expect Ocado to on average fulfil 16% of partner sales, leading to an eventual CFC count of 150 by 2040, from 203 previously," the bank said.

"Previously, we assumed that Ocado CFCs would fulfil effectively all online partner sales; however, we are now of the view that not all segments of online grocery are likely to be fulfilled by Ocado CFCs."

Goldman explained that in large markets like the US, orders are split 50/50 across delivery/click and collect, and Ocado is primarily used for delivery. Meanwhile, same-day deliveries represent a big proportion of the market, of which the majority are low basket sizes fulfilled by bikes.

"Whilst Ocado has developed the Zoom quick delivery proposition, and we estimate roughly a third of Ocado.com sales are delivered same-day, we expect significant competition from 3rd party platforms such as Instacart, Deliveroo, and Uber Eats, and we do not assume Ocado will retain a 100% share of this channel amongst its partners’ orders," the bank said.

If Ocado did maintain 100% share of this channel among partners' orders, the price target for the stock would be 1,066p.