JP Morgan (JPM) has reduced its price target for Ocado Group PLC (LSE:OCDO) from 450p to 400p, foreseeing considerable hurdles for the company's online grocery activities in the coming months.
In reaction, the stock lost 5.2% to 412.3p.
As per JPM, the challenges facing Ocado are manifold, with one of the key issues being the growing market share of physical discounters amidst shrinking consumer budgets.
Recent Kantar data points to a boom in discounters, which are performing well in the current economic landscape.
Conversely, Ocado finds itself grappling with inflation-driven price increases, which are largely counteracted by smaller customer shopping baskets. Furthermore, rising costs, such as wages and utilities, are having a detrimental impact on the profitability of Ocado's UK Retail arm.
After analysing Ocado delivery pass (ODP) data, JPM suggests that the consensus revenue forecast for 2023 may be overly optimistic, with its own prediction sitting 2% lower than the field.
Given the modest profitability of Ocado's UK Retail operations in 2023, JPM expresses doubts about the Retail division's ability to provide the necessary uplift for the company's Solutions operations.
The shift towards more centralised customer fulfilment centres (CFCs) seems to be happening slowly across the industry, with supermarkets currently favouring in-store picking solutions, the US bank said in a short note to clients.
This approach allows them to capitalise on their existing branch network whilst minimising capital expenditure. This trend, combined with the emergence of new online-only rivals, poses further questions about Ocado's future performance.
Despite a year-to-date drop of 30% and a 44% tumble over the past 12 months, Ocado's current share price still anticipates the introduction of an additional 54 CFCs, almost doubling their current portfolio.
However, JPM anticipates a dearth of new partnership announcements, which have traditionally been key drivers of share price.
Taking these factors into account, JPM views Ocado as less appealing compared to other European internet sector firms, maintaining an 'underweight' stance. The firm has also placed Ocado on a 'negative catalyst watch' in the lead-up to its interims due next month.