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Is the Deliveroo share price a bargain ahead of next week’s update?

A Deliveroo rider cycles in London
Image: Deliveroo

The Deliveroo (LSE: ROO) share price has endured a difficult past month. Falling over 15%, the stock is now back to where it was in June (and down 3% over the last year). 

Today, I’m taking a fresh look at the company and asking whether this weakness could represent an opportunity in advance of next week’s Q3 numbers (due 20 October).

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Deliveroo share price: time to hop on board?

Based on its most recent set of numbers, Deliveroo certainly looks like a compelling growth play. 

Back in August, ROO revealed that the value of orders placed using its platform had more than doubled in the first six months of its financial year to £3.39bn. Importantly, the company also said that it had seen “no material impact” from the reopening of restaurants in Q2. This was always one of my biggest concerns with the stock and suggests that there has now been a permanent shift in consumer behaviour.

A spate of deal-making in recent months has also been very encouraging. Building on its existing partnership with German discounter Aldi, ROO has recently hooked up with another supermarket, Morrisons, to offer a rapid delivery service (Hop) in southwest London initially, 

Clearly, any signs of initial success with this initiative and news of more deal-making next week could reassure holders. It could also succeed in helping the Deliveroo share price recover its mojo after a wobbly September.

On the other hand…

As positive as recent developments have been, there are also a number of reasons to steer clear. Perhaps the most pressing of these is that investors are taking flight from previously-loved growth stocks such as ASOS, partly due to concerns over cost inflation and supply chain hold-ups.

One might rationally argue that Deliveroo is operating in a very different area. But it’s still part of the next-gen, tech-based business wave. What worries me is that ASOS is profitable. Deliveroo won’t be for some time. This makes it harder to accurately value its stock, and this ‘jam tomorrow’ strategy could really backfire if we see a rise in interest rates to quell inflation.

Competition is another concern. We’re not only talking Just Eat or Uber Eats here. Across the UK and Europe, new firms promising ultra-fast delivery have sprung up, attracting customers with big initial discounts. That means margins will likely be very small for everyone involved. It also makes ROO look unexceptional.

Interestingly, JP Morgan recently cut its target for the Deliveroo share price to 320p from 393p. That’s not encouraging in the run-up to next week’s update. However, it may be more realistic considering the challenges ahead. And to be fair, it would still give me a 15% gain from here.

My verdict

The Deliveroo share price still languishes far below its IPO value (390p). So long as the firm is able to continue winning market share and show progress towards making a profit, I think there’s a good chance of the company getting back to this level in time. The question, however, is just how long investors will be patient.

As things stand, I think we might see a brief rally on 20 October. That said, I’m still not tempted to buy today. To really get me interested, the Deliveroo share price needs to fall significantly.

I feel ROO definitely isn’t a bargain today.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS, Deliveroo Holdings Plc, Morrisons, and Uber Technologies. 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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