If you fire up your computer or phone to get your groceries, there’s an increasing chance you might rely on British online supermarket Ocado Group’s technology. That’s thanks to the company’s big deal with U.S. supermarket giant Kroger this month, which comes after negotiating other partnerships around the world.
But with Ocado’s shares OCDO, +1.46%[1] having soared roughly 60% in May, you might not want to bank on the stock. Even some fans are suggesting it’s time for shares to digest their Kroger-driven pop.
“We think there is a great deal for management to now execute on, and thus see a low likelihood of another major deal in the near term,” say RBC analysts led by Sherri Malek in a recent note. They put a price target of 7.50 pounds ($10.04) on the stock along with a Sector Perform rating, saying it’s already “fairly valued” and implying it will drop 14% from a recent £8.70.
The pact with Cincinnati-based Kroger[2] KR, +0.20%[3] calls for the U.S.’s largest supermarket chain to raise its stake in Ocado to more than 6% and to license the U.K. company’s technology, which facilitates deliveries and warehousing. It’s a “transformation licensing deal” that has “squashed skepticism about the validity of Ocado’s solution for online grocery retailing,” write Malek and her colleagues. Ocado, founded in 2000 by three former Goldman Sachs bankers, has a two-pronged business model, selling groceries directly to people, while also licensing its technology to other companies, including French retailer Casino Guichard-Perrachon CO, +0.15%[4] , Britain’s Wm. Morrison Supermarkets MRW, +0.41%[5] , and Canadian grocer Sobeys, which is owned by the Empire EMP.A, +1.57%[6] conglomerate.
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The market loved the Kroger deal, sending Ocado’s stock up by 44% on the day the agreement was unveiled — May 17. Traders said a short squeeze added to the surge.
Now comes the tricky part. The Kroger deal and other recent agreements have left management with a lot to do, the RBC analysts note. “While Ocado’s solid operational track record gives us confidence in...