Ocado Group PLC (LSE:OCDO) may have impressed investors with a new overseas deal with South Korea's Lotte Shopping, but JPMorgan analysts believe that to "justify" the current valuation the company still needs to sign around a dozen similar-sized deals.
And that's with the stock at a third of the levels seen 12 months ago.
The investment bank.s analysts noted that Ocado had leapt 39% on the news, which they said was likely to have been driven by both the "strong message" on the deal's limited additional capex requirements and a high level of investors shorting the shares.
At Tuesday's closing market cap of £5.3bn, at just over 650p per share, "an additional 78 incremental CFCs (customer fulfilment centres) are required", said JPMorgan analyst Marcus Diebel, calculating a net present value of £58mln for each CFC.
Supporting the company's expansion, he said, rapidly changing consumer shopping habits are pushing grocery bosses into strategies to boost online selling.
"However, what also becomes clearer to us is that the shift towards more CFCs is likely to remain slow," the analyst added.
This is because in-store picking solutions, rather than a large roll-out of new centralized CFCs, "appear to be the preferred choice for established supermarkets at this point", as it allows the Tescos, Sainsburys, Carrefours and others to "better monetize" their established branch network.
As such, and with Ocado needing to keep up the deals momentum to drive its share price further, the JPMorgan analysts downgraded his rating to 'underweight' from 'neutral' previously, with a price target of 500p.
Diebel concluded that "we see risk-reward as unattractive relative to other names in the European internet sector."