Why Deliveroo shares may be undervalued right now

Motley Fool contributor Chris MacDonald discusses why Deliveroo shares may be a steal for his portfolio at a discount to the company’s IPO price.

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One top UK growth stock I’ve had on my watch list for some time is Deliveroo (LSE:ROO). Indeed, Deliveroo shares have underperformed since the company’s IPO in March. Still trading approximately 15% below its IPO levels, Deliveroo shares are beginning to look attractive to me.

Why?

Well, Deliveroo’s growth prospects are particularly intriguing. As a leading online food delivery platform, Deliveroo took advantage of a surge in online ordering activity to list its shares at what investors seemed to feel was an opportune time. Given expectations the economy could fully reopen sooner thanks to impressive vaccination campaigns, this is a stock that hasn’t performed as well as many expected earlier this year.

That said, there’s room for hope. Here’s why I believe Deliveroo shares have plenty of upside from here, and I’m considering them for my portfolio.

Growth is key for Deliveroo share performance 

The continued impressive performance of Deliveroo shares recently is notable. Sure, the economy hasn’t yet fully reopened. Some restrictions have been lifted. However, the potential for further lockdowns looms heavy over key markets Deliveroo focuses on. For Deliveroo, this is less of a risk than an opportunity. This provides a level of portfolio diversification that’s hard to come by today, given the cyclically sensitive nature of many sectors.

Organic growth remains strong at Deliveroo in this environment. The company’s recently reported year-over-year increases of 76% for gross transaction value and 88% for order volume is impressive. Additionally, Deliveroo has put forward improved guidance into the latter half of this year. 

To spur organic growth, Deliveroo has made some intriguing strategic moves of late. One I’m focusing on specifically is a recent partnership deal with Alipay, a company partly-owned by Chinese e-commerce juggernaut Alibaba. The deal provides for offers and discounts using AlipayHK. Given the size of the Chinese market, and Deliveroo’s impressive performance abroad, this move could stoke some impressive growth on the horizon.

I think the valuation of 3.3 times forward sales for Deliveroo shares isn’t that expensive at all. In fact, for a company with forward-looking revenue growth expected to be around 45%, this is a valuation I can get behind. Whether the market will is a whole other story.

Bottom line

Deliveroo is a company that isn’t without risk. Quite the contrary, actually.

Should the economy fully reopen tomorrow and interest rates skyrocket to reflect higher inflation than we’re already seeing, this will be a double whammy for Deliveroo shares. This is a company that has thrived in the pandemic environment, and is also a growth stock. Growth stocks are negatively impacted by higher interest rates.

However, assuming rates are likely to remain lower for much longer, and consumers will practice muscle memory via ordering in rather than dining out, Deliveroo is a company I’m considering here. This is a company still trading at a discount relative to its IPO price. I see Deliveroo shares as undervalued and am considering taking a position on dips.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Chris MacDonald has no position in any stocks mentioned in this article. The Motley Fool UK owns shares of and has recommended Alibaba Group Holding Ltd. 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.

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