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Should I buy Deliveroo after its share price drop?

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A Deliveroo rider on the move
Image: Deliveroo

The Deliveroo (LSE: ROO) share price has fallen over the past month. The food delivery mammoth has risen 17% in value over the past year. But the share price steadily reversed from the record highs around 395p recorded in mid-August to 335p today. Does this represent a top dip buying opportunity for my portfolio?

Why Deliveroo’s share price could rebound

Here’s why I’m interested in Deliveroo shares today:

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  • It has the bit between its teeth. The Deliveroo share price got off to a stinker following the company’s IPO back in March. But it steadily gained traction thereafter on the back of some impressive trading numbers. It upgraded its full-year guidance back in July, and its latest update showed revenues rocket 82% between January and June. More forecast-beating sales could give Deliveroo’s share price fresh doses of rocket fuel.
  • Service expansion rolls on. Deliveroo continues to build its restaurant base at a feverish pace to win business from hungry customers. In the second quarter alone it added another 10,000 sites to its books. It is also continuing to build its grocery business and more recently it teamed up with Boots to offer home deliveries on hundreds of health and beauty products.
  • Online food delivery is tipped for more explosive growth. Deliveroo’s profits rocketed as the broader online food delivery market ballooned following the Covid-19 breakout. Industry forecasts suggest that the market will keep growing at a tremendous rate too. Statista expects the UK online food delivery market to to be worth $15.9bn by 2025 versus $11.1bn today.
  • Delivery Hero grabs a slice. News that German food delivery colossus had acquired a 5.09% stake in the business helped Deliveroo’s share price hit their peaks last month. It’s not a surprise as to why, as it’s fed speculation that a full takeover could be coming. At the very least, multinational mammoth Delivery Hero could help the UK share gain traction in its own markets.

Heres what I’d do now

There’s clearly reasons to be bullish on the food delivery giant, then. But I for one won’t be buying Deliveroo shares following the price drop.

I’m concerned about the huge investment costs the business is incurring to build its platform, expenses that mean City analysts don’t think it will make a profit until 2024 at the earliest.

It’s likely that Deliveroo will need to keep splashing the cash to take on its rivals as well. The business now has more food merchants on its books than any other service. But competition from the likes of Just Eat, Uber Eats, and a gigantic list of smaller operators is immense and poses a big threat to future profits.

Meanwhile, criticism of Deliveroo’s employee practices continues to rumble on in the background. And this could eventually force the company to make changes that could significantly push up labour costs. Concerns over this smacked the Deliveroo share price shortly after its March 2021 IPO and could do so again.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Just Eat N.V. 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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