The Deliveroo (LSE:ROO) share price has had a pretty volatile week. After surging by double-digits on Monday, the UK stock started falling again just a few days later. Despite this up and down behaviour, Deliveroo’s share price has increased by around 18% since its IPO at the end of March 2021. But what’s behind this volatility? And should I see it as a buying opportunity for my portfolio?
The turbulent Deliveroo share price
At the start of the week, the firm’s German rival, Delivery Hero, reportedly acquired a £285m stake in Deliveroo. That’s approximately 5% of the business. Seeing a surge in Deliveroo’s share price on this news is hardly surprising. After all, high buying pressures push stocks upward. However, it also indicates that Delivery Hero sees a lot of potential in the British food delivery service. And looking at the results published a few days later, I can see why.
Despite restaurants now being open again in the UK, it seems consumer takeaway habits from 2020 haven’t subsided. Gross transaction volume (the total value of all orders placed on the platform) increased by 102% over the last six months, rising to £3.39bn. This surge in user spending enabled revenues and gross profits to leap by 82% and 75%, respectively.
For a recently minted high-growth UK stock, this is quite a promising sign, in my opinion. Even more so, given investor concerns about reduced spending once lockdown restrictions ended. So why did the Deliveroo share price fall on this report?
Staying in the red
There are undoubtedly multiple factors behind Deliveroo’s recent tumble. But one primary concern that keeps rearing its head is the lack of profitability. Gross profits did increase to £263.9m. However, due to accelerated reinvestment by the management team, margins actually fell from 8.8% to 7.8% compared to a year ago.
Despite the weakening margins, operating losses have begun to fall. In the last half-year period, pre-tax losses dropped from £127.1m in 2020 to £107.2m. That’s an encouraging sight. At least, I think so. But it does beg a simple question — If Deliveroo can’t be profitable when restaurants are being avoided, then when can it? This is something that its competitor, Just East Takeaway, has had to grapple with. And just like Deliveroo, its share price in 2021 has suffered for it.
The bottom line
All things considered, this report looked relatively solid in my eyes. However, my opinion on this business remains unchanged. Growth is ultimately meaningless if it doesn’t eventually lead to the creation of value for shareholders. And as it stands, I still don’t see a clear trajectory for Deliveroo to begin generating profits, especially in an environment that’s becoming less favourable to food delivery services with each passing day.
For those bullish on Deliveroo’s share price, this might be a buying opportunity. But personally, I’m keeping this business on my watchlist until more information becomes available.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.