Ocado's valuation is unreasonably high, thinks Barclays

Ocado was downgraded to 'underweight' at Barclays from 'equal weight' as while the online grocery business has been de-risked, this does not guarantee "unlimited upside" for the share price.

Over the last nine months the company has been catapulted into the FTSE 100 after confounding many doubters by signing signing up four overseas retailers for its Smart Platform robot-operated warehouse system: France's Casino, Sobeys of Canada, Sweden's ICA and US giant Kroger the most impressive of all.

"After several years of unfulfilled promise, the willingness of third parties to pay for Ocado’s online grocery expertise has undermined a central bear argument on Ocado," Barclays analysts wrote.

Raising £340m of cash in the first half also minimises medium-term balance sheet concerns investors may have had.

"However, eliminating serious bear points does not mean unlimited upside for the share price and we think that a more reasonable valuation is now around 875p."

With the share price having risen to almost 1,100p, Barclays target implies around 20% downside.

Ascribing a value to Ocado is "art not science", the analysts declared, as even with multiple deals signed, putting a value on them implies many assumptions that can be debated at length, with fairly minor tweaks to Barclays' assumptions liable to produce very different results – "including valuations that are lower than our new price target but also valuations that imply upside from the current share price".

Future licensing deals may boost the share price but "we struggle to foresee further deals approaching anywhere like the magnitude of the Kroger deal", which involves building 20 customer fulfilment centres.

“Having opened four CFCs in its home market in 18 years, Ocado must now work on 23 in the coming few years — spread thousands of miles apart. Flawless execution would be impressive — any delays could be problematic,” the analysts said.