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(Sharecast News) - Ocado surged on Wednesday after JPMorgan Cazenove upgraded the shares to 'overweight' from 'neutral' and lifted the price target to 400p from 340p.
The bank said that having been either 'neutral' or 'underweight' on Ocado since 2018, it is revisiting the investment case and has identified several reasons to be more optimistic, as many of its previous concerns are beginning to dissipate.
JPM said its analysis of the global eGrocery space shows the rising possibility of new deals in Ocado's Solutions operations.
"We argue that the slow adoption of online grocery shopping so far hasn't been demand-driven (evidenced by strong customer reviews) - instead, we attribute the stagnation in recent years to ongoing supply constraints," it said.
"Supermarkets have been hesitant to run both offline and online channels simultaneously, focusing instead on margin protection and relying on far less efficient store-picking solutions to support online sales.
"This approach might work in the short term as long as online sales remain small. However, given the high costs when utilising store-picking solutions, we believe this is unsustainable longer term as online sales grow."
Meanwhile, it said that online-only supermarkets in Europe and Walmart in the US are increasingly gaining market share, pushing more traditional supermarkets to find scalable solutions, such as Ocado.
JPM also pointed that Ocado's margins are improving quickly in both the retail and solutions segments, driving positive free cash flow generation by the end of 2026, which should allow the company to refinance about 500m in convertible bonds in 2025/26.
It also argued that following the recent share price drop, the stock's valuation is attractive.
At 1205 GMT, Ocado shares were up 15.9% at 289.59p, while shares of its retail JV partner Marks & Spencer were 1.8% higher at 338.50p.
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