Deliveroo (LSE: ROO) made a poor debut at the stock markets earlier this year. But I think it is increasingly clear that this was no warning of the company’s future performance. This is evident in its latest trading update, which has clearly made investors happy. The Deliveroo share price has crossed 300p for the first time, up by over 3.5% in today’s trading session so far.
But what about the update is so positive?
Growth outlook upgraded for the second time this year
Deliveroo’s outlook looks particularly good to me. It has increased it expectations for growth in gross transaction value (GTV) for the second time this year. GTV is the total value paid by consumers minus any discretionary tips. Its latest update puts GTV growth expectations at 60%-70% in 2021. Its initial expectations were for a 30%-40% growth, upgraded in July.
The latest increase means that it expects a whole 30 percentage point increase in growth from its initial estimates! This is impressive considering that this was supposed to be the year of post-lockdown growth correction. Growth has corrected, to be sure. For the nine months of the year so far, growth is at 82%. In the third quarter of this year by contrast, it is down to 54%. But even this is quite resilient.
The Deliveroo-Amazon tie-up progresses well
I also like that Deliveroo has found new solutions to ensure growth. It recently entered into a partnership with Amazon Prime, according to which, Prime customers in the UK and Ireland are entitled to one year of free membership to Deliveroo Plus. This allows free delivery for orders over £25 or €25. This has been successful so far. In the one month since the programme’s launch, the number of Deliveroo Plus customers in the region have doubled. This is an important development, since this geography accounts for half of the company’s total revenues.
Ensuring rider satisfaction
I also like the steps it has taken to ensure rider satisfaction. The company found itself in hot water across countries as local delivery riders demand better terms. Possibly in an attempt to address this, it has now decided to provide an insurance cover for regular riders who have been unable to work for over 7 days. It will also make a lump sum payment following the birth or adoption of a child.
Why I am cautious about the Deliveroo share price
Based on its growth and these initiatives, I am quite positive on the company as a long-term investor in it. However, there are two aspects that still make me cautious. One, even with all the promising developments, its share price has not risen significantly. In fact, since it listed earlier in the year, it is up only 4.7%. It has also come off by almost 24% from the highs of August. I will watch its share price closely after this update to assess if investor perception of the stock has changed.
Two, it is in a competitive market with the likes of Just Eat Takeaway and Uber Eats as its peers. So it may need to constantly innovate or expand across geographies to remain ahead.
My takeaway
So far, it is doing well. Deliveroo is a buy for me.
