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Why I think the Deliveroo share price dip is a buying opportunity

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A Deliveroo rider sprinting on a bike
Image: Deliveroo

Spending a weekday evening in with a streaming show and takeaway order can be a great thing to do on occasion. But even better than that is getting a deal in the process. I experienced this first-hand yesterday when ordering in from Deliveroo (LSE: ROO). A couple of weeks ago, it tied up with Amazon to provide free food delivery for Amazon Prime members.  

Deliveroo ties up with Amazon

Amazon has been an investor in Deliveroo for some time now, but this is the first such deal that  directly benefits its customers. It is also an opportunity for Deliveroo to bring Amazon Prime members to it, who may otherwise order from other delivery apps.

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How far this impacts Deliveroo’s sales remains to be seen. But for now, it sounds like a potentially positive one. Amazon has shown high growth during the pandemic, adding 50m Prime members world-wide during this time. If it continues to keep up the momentum, the benefits could keep trickling down to Deliveroo too.

Good growth so far 

Deliveroo has already performed well this year. And while growth rates have corrected from the atypical increases seen last year, they are expected to stay strong. An Amazon boost could push them up further. This is its second big tie-up this year. A few months ago, it tied up with supermarket Waitrose for grocery deliveries for two years. While this had earlier been tried out on a pilot basis, the latest tie-up extended it to 150 Waitrose shops. 

The Deliveroo share price plunge opportunity

Despite all the positive news around the stock, Deliveroo’s share price has actually fallen. After rising to almost 400p in August, it plunged to 289p as of yesterday’s close, wiping out almost all the gains seen since it started trading in late March. This looks like an opportunity for me to buy more shares for my portfolio.  

This is especially because it is comparatively less pricey than its peers like Just Eat Takeaway. Since both companies clock net losses as of now, instead of the standard price-to-earnings (P/E) ratio, I compared them as per the price-to-sales (P/S) ratio. Deliveroo’s P/S as per my calculations is at 4.4 times while that of Just Eat Takeaway’s is at 7.7 times. The actual numbers look different across various sources from these calculations, but they make the same broad point. That Deliveroo is the less expensive stock. 

The downside

The one downside, however is that it can face rising costs. One of these can potentially be on account of better terms for its delivery riders, who are part of the gig economy so far and not beneficiaries of social security. Also, there coult be a run-up in labour costs as the economy picks up and especially in markets like the UK, that have seen some exodus of workers due to Brexit. 

My takeaway

All in all, however, at its current levels, the Deliveroo share price looks attractive to me. I think the food delivery business can go a long way, and innovative solutions, like its tie-up with Amazon positives in my view. And so far its labour related challenges have not been big enough to strain growth. 

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Manika Premsingh owns shares of Deliveroo Holdings Plc. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Just Eat Takeaway.com N.V. and has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. 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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