Ocado shares worth 72% more

These really are heady days for Ocado Group. Having just overtaken Sainsbury (J) on its way to the FTSE 100 Index, the online grocer-turned-IT stock now finds itself being spoken about in the same breath as the world's tech titans.

In a note entitled "The Microsoft of Retail", Peel Hunt analysts said Ocado's automated fulfilment technology had the potential to become the standard platform for retail logistics across all sectors, not just groceries.

The Peel Hunt team backed up their claims with a target price of 1,700p, which compares with the record high of 1,111p reached earlier this month.

The newly-promoted blue-chip stock has now risen by more than 200% in the past year, representing quite a slap in the face for the many analysts and short-sellers who previously disputed the company’s potential.

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That all changed with a series of deals with overseas retailers in the past year, culminating in last month's partnership with Kroger to create as many as 20 automated Customer Fulfilment Centres in the United States, where Kroger is the country's second largest grocer.

Peel Hunt now thinks that Ocado Solutions has the potential to generate as much as £8.3 billion in revenues by 2028, leading to an enterprise value of £10 billion.

But to get there, the broker says that Ocado will have to forget about exclusive contracts and instead focus on becoming an open industry standard in the same way as Microsoft's Windows operating system.

Source: interactive investor      Past performance is not a guide to future performance

This avoids a scenario where niche, closed, exclusive platforms can enjoy a quick rise, but then eventual stagnation.

They said:

"For Ocado to supersize over the longer run and become the operating system for retail, it will have to be less niche and become the standard."

Peel Hunt believes Ocado's addressable market can be extended to all retailers, particularly as the continual decline of store based retail continues.

The excitement over Ocado's growth prospects has propelled the stock in to the FTSE 100 Index, even though its last set of annual results in February showed only a £1 million profit and broadly flat underlying earnings of £86 million.

With other brokers including Bernstein and Goldman Sachs also upgrading their price targets in recent days, Ocado briefly overtook Sainsbury’s in terms of market capitalisation. Ocado is currently valued at £6.6 billion.

Our resident stock-picker Edmond Jackson backed Ocado shares in January with the price at 525p, but admits that trying to define a trading range in the short to medium term is near to impossible.

Recommending a 'buy the dips' approach, Jackson said last month: “Ocado is showing it has genuine potential as a British answer to Amazon and a technology licensing success story to boot.

"I think it's way over-valued on proven financials, but Amazon's example has shown this can persist for plenty of years."

The rise of Ocado is having a positive impact elsewhere on the stockmarket, with AIM-listed Solid State recently announcing that it had won a contract to design and supply bespoke power units for a "major UK technology smart warehouse solutions provider".

It's widely assumed that the client for this £4.3 million contract is Ocado, with the battery technology company no doubt hoping that it can do the same for US and European warehouses too.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.