The Deliveroo share price: opportunity or trap?

Rupert Hargreaves explains why he thinks the Deliveroo share price offers potential, even though it’s fallen out of favour with the market.

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After one of the worst IPO performances in the history of the London market, the Deliveroo (LSE: ROO) share price rewarded investors with a substantial rally between June and the middle of August. During this period, the stock recovered all of its post-IPO losses. 

However, since reaching an all-time high of 395p on the 18 August, shares in the delivery giant have fallen by more than 30%. 

But I’ve been encouraged by the company’s recent growth and turned positive on the stock. And with that in mind, I’ve been watching its fall from grace closely to see if this could be an opportunity for me to snap up shares in the delivery giant at a discount price. 

Deliveroo share price opportunity

Whenever I consider buying a stock that’s seen a substantial decline, I try to understand why before initiating a position. 

When it comes to Deliveroo, it doesn’t seem as if there’s been any one specific reason. The group hasn’t issued any notably negative updates, and it’s continued to sign collaboration agreements with companies such as Amazon. The organisation’s also launched a new rapid grocery delivery service with Morrisons

As such, it doesn’t look as if there’s any fundamental reason why the Deliveroo share price has performed so poorly over the past few weeks. Instead, I think the stock’s suffered from a general shift in sentiment from investors towards technology companies.

Indeed, as investors have been reducing their exposure to Deliveroo, they’ve also been selling shares in Boohoo and THG. Over the past six months, shares in these retailers have lost around two-thirds of their value. 

Improving outlook

Considering the above, I don’t think Deliveroo’s share price is a value trap. The company’s operations are expanding, not shrinking. The latter’s the hallmark of a value trap. 

Therefore, I think this could be an opportunity for long-term investors to snap up some shares of this enterprise at a discounted price. As the company’s growth continues and management seeks out more collaboration agreements, its footprint should expand. 

Still, this isn’t a risk-free investment. The food delivery market is incredibly competitive. Deliveroo is still spending hundreds of millions of pounds every year on marketing and distribution. Due to costs like these, it isn’t expected to generate a profit anytime soon. 

It’s also facing pressure from policymakers who want companies like Deliveroo, which rely on the gig economy, to improve working conditions for couriers. Improving working conditions will cost money. 

I think the corporation has the resources to overcome the challenges outlined above. And as it continues to grab market share, economies of scale should improve. This will ultimately leave the company with more resources to fight competitors and cover extra costs. 

Those are the reasons why I’d buy the stock for my portfolio today.  

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Deliveroo Holdings Plc and Morrisons 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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