Deliveroo’s share price has crashed. Should I buy the stock now?

Deliveroo’s IPO last week was a flop. Edward Sheldon looks at whether he should buy the stock after the share price fall.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Last week, food delivery company Deliveroo (LSE: ROO) listed on the London Stock Exchange via an Initial Public Offering (IPO). It’s fair to say the IPO was a flop. On Thursday, the stock closed at 282p – about 28% below the opening price of 390p.

Has Deliveroo’s share price fall created an opportunity for me to buy the growth stock at an attractive valuation? Let’s take a look at the investment case.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

Deliveroo shares: the bull case

There are a few things I like about Deliveroo from an investment point of view. One is that the company – whose mission is to be the ‘definitive’ online food company – is growing at a rapid rate. In 2020, for example, gross transaction value (GTV) rose by 64% to £4.1bn. Meanwhile, underlying full-year revenue rose 58% to £1.2bn.

It’s worth noting that, while Deliveroo has experienced rapid growth so far, it believes it’s “only just getting started.” It says that bringing the food category online represents an ‘enormous’ market opportunity.

I also like the fact that the company is founder-led. Will Shu started the company back in 2013 and he’s still CEO. He’s also the majority shareholder, which means he’ll be keen to see the company (and the share price) do well. Quite often, founder-led companies turn out to be good investments.

The risks

I do have some concerns over Deliveroo shares. One is the company’s still generating large losses. Last year, it registered an operating loss of £221m. The year before, the operating loss was £320m. This adds risk to the investment case. I tend to avoid unprofitable companies unless the opportunity is really compelling.

It’s also worth pointing out that the path to profitability could be challenging. Recently, the Supreme Court ruled that drivers at gig economy rival Uber are workers and not self-employed. This looks set to cost the company hundreds of millions of dollars.

This could have big implications for Deliveroo. It may have to improve pay and conditions for its delivery workers. Many large institutional investors such as Legal & General, Aberdeen Standard, and Aviva are avoiding Deliveroo shares due to concerns over workers’ rights.

Another concern is that the company faces heavy competition from the likes of Uber Eats, Just Eat, and delivery companies in other countries. It’s certainly not alone in the food delivery space. Rivals could steal market share. Does it have a strong competitive advantage? I’m not so sure.

Finally, there’s the valuation. At the current share price, Deliveroo sports a market capitalisation of about £5.5bn. Looking at the price-to-sales ratio (4.6, using last year’s revenue), that market-cap isn’t outrageous by tech stock standards. However, it does add a bit of risk, given the lack of profitability and the threat of regulatory intervention.

ROO shares: my move now

Weighing everything up, I’m going to keep Deliveroo shares on my watchlist for now.

I think there are probably safer growth stocks I could buy right now.

Like this one...

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you'll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

Edward Sheldon owns shares in London Stock Exchange and Legal & General Group. The Motley Fool UK has recommended Just Eat Takeaway.com N.V. and Uber Technologies. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Electric cars charging at a charging station
Investing Articles

A cheap UK share I’d buy for the electric vehicle revolution

This cheap UK share has collapsed in value since I bought last year. But here's why I'm thinking of buying…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

3 distressed stocks with huge potential that I’m considering for my portfolio!

These three distressed stocks have performed badly in 2022, but that doesn't mean they won't recover. Here's why I'm considering…

Read more »

Luxury inside of NIO car
Investing Articles

Here’s why I’ve just bought NIO shares!

I've recently bought NIO shares, despite the stock being down nearly 80% over the past year. Here's why!

Read more »

Mature people enjoying time together during road trip
Investing Articles

Is now the time to buy Tesla shares?

Tesla's share price has fallen in 2022 and so has its valuation. Edward Sheldon looks at whether this is a…

Read more »

A graph made of neon tubes in a room
Investing Articles

Are Woodbois shares worth me buying at 4.7p?

Jon Smith considers the recent surge in price for Woodbois shares, and wonders if the move lower last week represents…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

How I’d generate a passive income for life with just £20 a week

Dividend shares can be an excellent way to earn a passive income for life. Our writer discusses a plan to…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Hargreaves Lansdown investors are buying these cheap FTSE 100 shares. Should I?

Paul Summers takes a closer look at two cheap FTSE 100 stocks that were proving very popular with investors last…

Read more »

A retired couple review their investing portfolio
Investing Articles

Investing in dividend stocks: 5 shares with BIG yields to buy!

I think investing in stocks is a great idea following recent market volatility. I can pick up some of the…

Read more »