Here’s Why Ocado’s Risk/Reward is ‘Out of Kilter’

Shares of Ocado Group (LON: OCDO) plunged 20% Thursday, the most in 11 years after analyst Andrew Gwynn of BNP Paribas Exane cut his recommendation to “Underperform” from “Neutral.” 

The top-rated analyst cited a recent rally in the stock price, as well as “subdued” retail volumes and the retirement of Ocado Solutions boss Luke Jensen, as reasons for his downgrade.

The recent rally — Ocado shares climbed from below 400p to above 900p from June to July — has left the risk versus reward ‘out of kilter,'” Gwynn wrote in a note. 

In addition, he said “subdued” retail volumes and the retirement of Ocado Solutions boss Luke Jensen do “not point to an over-flowing order book.”

Ocado shares have been one of the best performers in Europe’s benchmark Stoxx 600 Index this quarter. The stock was also boosted by speculation of a takeover bid.

The online supermarket stock is one we had a negative view in late 2022 and early 2023, but we took a more neutral stance after shares dropped below 400p. 

Ocado Web Traffic – Source: Semrush

However, Semrush data continues to show a slide in web traffic, while Google Trends shows that searches for the company remain subdued, down 3% in the past 12 months. Short interest has stayed at around 3.5% in the last couple of months.

Supermarket Average Basket Size August – Source: Which?

Even so, this data hasn’t transferred to a drop in customers for Ocado, which revealed average orders, retail revenue, and active customers grew in its Q3. One area where the company is facing issues is inflation, with customers buying fewer items. The average basket size declined by 3.9% year-on-year in Q3, while in its H1 earnings report, OCDO said the average basket size fell by 6.3% YoY.

By Sam Boughedda