How will a change of supplier hit Ocado’s share price?

Ocado’s [OCDO.L] share price has continued to deliver this year, surging 98.2% for the year to hit a record high of 2,535p on 26 August.

Ocado’s share price even survived the mid-March market wobble, as fears about the coronavirus pandemic took hold. It did fall to 1,077p on 12 March, but has since rebounded strongly. From its March lows, Ocado’s share price has climbed 132.68% to close at 2,506p on 1 September.

According to market research firm Kantar, Ocado has outpaced rivals with a 45.5% sales hike in the 12 weeks to 9 August, compared with 12.8% at Tesco [TSCO.L] and 10.9% at Sainsbury’s [SBRY.L].

Will a shakeup in supplier affect Ocado’s share price gains in H2?

Supplier switch

Ocado’s share price has rallied over 25% in the 6 weeks since it announced its results for the half-year to 31 May. In the results, Ocado revealed that revenues in its retail arm rose 27.2% to £1.02bn. Fees invoiced to international grocers using its online delivery and picking technology also climbed 58% to £73.7m.

Tim Steiner, Ocado’s CEO, hailed “years of growth in the online grocery market condensed into a matter of months”

He said that it had opened its first partner customer-fulfilment centres (CFCs) — near Paris for Groupe Casino, and in Toronto for Sobeys — and that COVID-19 would not lead to material delays in the roll-out of future CFCs.

Indeed, in early June Ocado raised £1bn to stoke this growth.

Ocado’s share price has accelerated again in August, as investors get excited by the future potential of online sales. The delivery firm’s upcoming online retail deal with Marks & Spencer [MKS.L] could well be another contributing cause of the surge.

In 2019, Ocado announced that it had formally sold a 50% stake in its retail business to the iconic high-street operator for around £750m. Instead of selling food products from Waitrose on its site — alongside its own brands and own-label goods —Ocado’s customers have been able to buy around 6,000 Marks & Spencer food lines since 1 September.

What could this new venture mean for Ocado’s share price?

Dividing opinion

“Bulls believe that Ocado’s share price is cheap, when you consider its unique business model of leveraging both online and offline sales. Some of these bulls refer to the firm as the Microsoft of Retail. However, there is also a group of vocal bears who don’t buy Ocado’s story in the age of Amazon,” Crispus Nyaga wrote in InvestingCube.

Barclays Capital, for instance, believes the firm’s market cap is “excessively generous”, particularly given its record of reporting losses.

It has an Underweight rating on Ocado and values the shares at 1,600p. “What is more difficult to determine is whether the surge in the share price fairly reflects growth in the market opportunity. It is hard to be scientific at this still-early stage,” it said.

Citi is also bullish, with a price target of 2,900p. It loves the long-term potential of Ocado’s solutions arm, even seeing its share price rocketing as high as 7,200p in the future.

Peel Hunt has hiked its price to 2,490p from 1,700p. “With more insight into the potential profitability of its solutions business at maturity, we look at 15 years out. Our base case assumes 25% market share of a market that is 50% online at that point,” the broker said.

According to MarketScreener, the average consensus amongst analysts is a Hold and an average target of 1,732p has been placed on Ocado’s share price.

Online shopping certainly seems here to stay, but Ocado will face more intense competition as a result — from both Amazon and more tradition grocery rivals.

Making a success of its Marks & Spencer deal will be crucial for Ocado’s share price to stay at the front of the queue.