HSBC has cut its rating for Ocado PLC (LON:OCDO) to ‘hold’ from ‘buy’ as it believes that while the risks for the technology-focused online grocery has shifted to its customers after recent key deals, they think they have not been completely eliminated.
After recent gains by the now FTSE 100-listed firm’s stock following recent positive newsflow, HSBC raised its target price for Ocado to 900p from 750p, albeit with the shares currently trading at 1,391.50p, down 3% on Wednesday’s close.
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In a note to clients, the global bank’s analyst said, while the group has lowered its direct exposure to the Grocery Home Delivery model through its recently announced joint venture with Marks & Spencer PLC (LON:MKS), it has not changed the fundamental economics of Grocery Home Delivery, which they believe are challenged.
The analysts added: “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 estimate that a further 40 customer fulfilment centres (CFCs) are required to justify Ocado’s current share price, in addition to the 25 already agreed.
“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,” the analysts concluded.