After its disastrous IPO, Deliveroo (LSE: ROO) shares are yet to return to their opening price of 390p. However, as the company’s outlook improves, I think it may potentially return to this level in the near future.
Disastrous IPO
The Deliveroo IPO was one of the most disastrous in recent history. And ever since the stock plunged more than 25% on its first day of trading, the company has struggled to rebuild investor confidence.
I was sceptical about the company’s prospects when it initially hit the market. Indeed, I was concerned that consumers would return to their usual habits after a pandemic, leading to a drop in demand for meal delivery services. I’ve also expressed concern about the stock’s valuation.
This hasn’t happened. According to its first set of results as a public company, revenue rose 82% in the first half of its financial year to £922.5m, and orders doubled. Meanwhile, pre-tax losses narrowed by around 20% to £104.8m in the first half.
More importantly, the company delivered 148.8m meals and groceries in the first six months of 2021. This was up around 100% from the prior-year period.
I think these figures show consumers, who turned to the platform in the pandemic, have continued to use its services. This seems to be a positive development for the Deliveroo share price.
Unfortunately, while the firm’s top line is still expanding, the business still has to invest heavily in its operations. The group margin on gross transactions after the cost of sales fell by 1% to 7.8%. Management is expecting the margin to remain depressed for the rest of the year.
I think these figures show the company is heading in the right direction. It appears I’m not the only one who thinks the Deliveroo share price is undervalued.
Deliveroo share price backer
Earlier this week, Delivery Hero, the Berlin-based food delivery group, announced it had built a 5% stake in its London-based peer.
Delivery Hero’s chief executive went on to Tweet that he believed the Deliveroo share price appeared “undervalued” and “oversold.” I think this is worth paying attention to. The CEO knows far more about the global meal delivery market than many investors. Delivery Hero doesn’t have a presence in the UK, but it does own a stake in Just Eat Takeaway.com.
Still, while it seems Deliveroo is heading in the right direction, the group still faces some significant challenges. These include competition and high costs. These are the reasons why it’s losing money. It’s expected to continue to do so for the foreseeable future. If it continues to lose money, the company may ultimately struggle to remain solvent in an increasingly competitive meal delivery market.
Despite these risks, I think the Deliveroo share price can continue to rise. It’s impossible to say with any certainty if, or when, the stock will surpass its IPO price. But, with its outlook improving, I think there’s a high possibility it can.
As such, I’d buy a speculative position in the stock today as a long-term growth play.
