Ocados share price slump has come as "no surprise" to analysts

Ocado's share price slump has come as "no surprise" to analysts

Ocado today (21 July) faced renewed criticism from parts of the investment community that its IPO had been overvalued despite the UK online retailer cutting the offer price for its shares.

Following the launch of the online grocer's IPO today, shares in Ocado had fallen 7.2% to 167p by 17:02 BST this afternoon.

Yesterday, Ocado cut the price to 180p less than a day before it was due to list after not enough investors accepted its initial range of 200p to 275p.

Verdict analyst Malcom Pinkerton said the slump in the share price was "no surprise" given the company is yet to make a profit and especially considering the negativity towards the chain in the market and the media.

HB Markets Investment Analyst Amisha Chohan concurred. "We are not surprised by any means. In our view, a share price between 105p to 120p per share is more reasonable."

Despite Ocado CEO Tim Steiner's bullish enthusiasm towards the firm's future prospects, Pinkerton said he would be "surprised if the chain performs as well as he [Steiner] says it will".

"Though opportunities remain in fulfilling pure-play retailers' sales to enhance the non-food offer, and joint ventures with grocers yet to enter the online market could provide potential for growth and international expansion, severe risks remain," Pinkerton added.

He suggested that the rumoured partnership with Carrefour would be a good way to take the business forward, as would partnerships with other UK retailers like Morrisons or Marks and Spencer, who are both yet to set up online grocery channels.

Pinkerton suggested that these sorts of partnerships would turn Ocado's intellectual property into a growth driver, as he is concerned that its current business model means that as the number of customers and orders grow, so to does its cost base, making it very difficult for it to become profitable.

Analysts are also concerned about Ocado's competition becoming more intense. Oriel Securities analyst Jonathan Pritchard said competition in London is hotting up, with both Asda and Tesco opening online-only warehouses, and that Ocado's growth will have to come from more outlying parts of the UK.

Pritchard also said Ocado's projected growth fails to take into account the impact of future competition issues: for example if Tesco were to suddenly offer free delivery to all Clubcard holders.

"This sort of multiple implies heroic growth at all levels and a lengthy period of upgrade momentum. We find it hard to get comfortable with this, given the many potential banana skins surrounding the story," Pritchard said.

In a conference call this morning, Steiner compared his company with online behemoths like Asos, Google and Apple. However, "for every Amazon there are at least five similar companies that disappointed the stock market," Pritchard added.