Last week saw the Deliveroo (LSE: ROO) share price hit record highs after the food delivery company upgraded its growth forecasts. Management now expects to handle up to £6.5bn of orders in 2021. That’s an increase of up to 60% on last year.
I’m impressed by this rate of growth, especially as last year’s lockdowns meant that orders surged in 2020. I’ve previously thought that Deliveroo shares looked expensive. But if the company can continue growing at this rate, I think the shares could actually be cheap today.
A disruptive business?
Some of the biggest investment success stories — such as Google, Amazon, and Facebook are businesses that are disruptors.
Disruptive businesses aren’t just straight competitors for existing businesses. Instead, they disrupt existing markets by doing something differently. This creates new opportunities for growth which may be far bigger than expected.
Amazon is a great example. The company started out in 1996 by selling books online, cheaper than book shops could manage. Amazon has since expanded into many new areas. Each time, it offers customers more than older rivals, usually at lower prices.
I think Deliveroo might be a genuinely disruptive business. If it is, then I think the Deliveroo share price could have much further to go.
Doing it differently
Getting a takeaway meal or shopping delivered to your home isn’t new. It was even possible before the Internet. Equally, cycle couriers aren’t new.
In my view, what’s disruptive about Deliveroo is the way it has brought these services together under one brand, on a huge scale.
Just as we talk about Googling a question, people are now starting to talk about using Deliveroo to deliver any kind of food or drink, quickly.
Deliveroo is already expanding from takeaway meals into other areas. In the UK it has a partnership with supermarkets Morrisons, Aldi, Co-Op, Marks & Spencer, and Waitrose.
Founder Will Shu wants his business to become the “definitive online food company”.
Shu’s vision is that people will routinely use Deliveroo to provide food, rather than shopping or cooking themselves. If he succeeds, I reckon this business may only just be getting started.
Deliveroo share price: buy or avoid?
Deliveroo’s growth has impressed me. I think it could become a one-stop urban food delivery service. But I do have a few concerns.
The company is seen as a technology stock, but I’m not sure how high-tech it really is. Deliveroo’s software takes customer orders and sends them to a shop or restaurant. The system then matches the order with the nearest available courier.
The only thing that really impresses me is that this technology is being used on such a big scale.
My other concern is simply that Deliveroo has never made a profit.
Admittedly, it took Amazon more than 15 years to become profitable. However, whereas Amazon has built a dominant position and has become very profitable, Deliveroo faces tough competition. As a customer, I don’t see much difference between ordering my food from Deliveroo or Just Eat Takeaway.
Forecasts suggest Deliveroo might generate a small underlying profit in 2023. For me, that’s too long to wait. If Deliveroo’s growth slows without it generating any profits, I think the share price could fall sharply. For now, this stock isn’t cheap enough for me to buy.
