Why the Deliveroo share price might now be justified

After positive Q3 results and improving worker conditions, Charles Archer thinks now might be the time to add Deliveroo to his portfolio.

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On 12 August, I asked whether the Deliveroo (LSE: ROO) share price was justified. At the time, I had two major concerns for its valuation. First, I was worried Deliveroo’s revenue would fall as restaurants opened up. Second, I was concerned that its independent contractors could be reclassified as more expensive employees. So I decided to wait for more information.

I’m glad I did. The Deliveroo share price has fallen 17% since then, from 362p to 300p as I write. But it’s up 24% in the past six months, and 4% in the past year. And after today’s Q3 results, I’m now tempted to add some shares to my portfolio.

Q3 results

The company’s key takeaway was “continued strong performance, with robust consumer engagement post-re-openings”. Full-year gross transaction value growth guidance was increased to 60%-70%. Investors were previously told to expect an increase of 50%-60%. GTV in Q3 alone was £1.6bn, a 58% year-over-year increase.

However, the company’s monthly active users fell by 300,000 to 7.5m. That’s a big concern for a growth stock. But average customer frequency stayed stable at 3.3 times a month in Q3 “despite the widespread removal of lockdown restrictions”. Some perspective is important though. Orders were up 64% to 75m orders in Q3 2021 compared to Q3 2020. And the company has expanded its food offering to 10,000 grocery delivery partners. 

CEO Will Shu commented that he expects the Deliveroo share price to show “further strong performance in the remainder of the year”. This positivity is exactly what I was looking for back in August.

Partnership promise 

On 15 September, the company launched a successful Plus partnership with Amazon. All UK and Ireland Amazon Prime subscribers are now entitled to a year’s free Deliveroo Plus membership. This grants subscribers unlimited free delivery on orders over £25/€25. Since the partnership started, Plus membership has doubled. And many of these new subscribers will be using the Deliveroo for the very first time.

It has also seen promising results from the launch of Deliveroo Hop, a London-based trial in partnership with Morrisons. Customers will be able to get grocery deliveries in as little as 10 minutes. And because availability is updated in real time, there’s no substitutions. Deliveroo has also launched a new partnership with Boots. Deliveroo is now delivering to every town in the UK with a population of over 50,000 people. I think it could become the primary delivery partner for most of the high street. 

Legal issues for the Deliveroo share price

In August, I was worried that the February Supreme Court ruling over Uber that forced it to reclassify some contractors as employees. This precedent could possibly be extended to Deliveroo contractors. However, my concerns have been somewhat alleviated. That’s because Deliveroo has enhanced benefits for most of its contractors, including parental leave and sick pay. UK Deliveroo riders now receive a £1,000 payment after the birth of a child. I think this makes legal action less likely. Contractors who value the freedom of self-employment are now also receiving some of the benefits of employment. 

My bottom line is that Deliveroo has shown continued post-pandemic growth, while also improving contractor conditions. And the Deliveroo share price has fallen 17% just before the lucrative Christmas period. I think now is an excellent entry point for me.

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. Charles Archer owns shares of Amazon. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Deliveroo Holdings Plc, Morrisons, and Uber Technologies 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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