The Deliveroo (LSE: ROO) share price has been having a rough time of late. It’s down almost 30% over three months, and has fallen 20% at the start of December alone.
The company listed on the London Stock Exchange via an initial public offering (IPO) back in March. However, the first trading day was one to forget as the shares plunged over 26%. It’s safe to say the share price has been rather volatile ever since.
Has the recent price fall created a buying opportunity for me? Let’s take a look at the potential investment.
The bull case
The first thing I like about Deliveroo is its network of partner restaurants and users on its online food delivery platform. This is operated through its 150,000 riders who deliver the food. Network effects can be a very powerful economic moat for a business as it stops competitors from taking market share. A really good example of this is Auto Trader. Therefore, it would be very difficult for a competitor to replicate this if Deliveroo is able to keep building its network of partner restaurants and users.
I’m also attracted to the company’s growth rate as revenue is forecast to grow by 56% this year. The company also operates in a truly global market, which may boost growth further in the years ahead. For example, Deliveroo already has 7.5m users across 11 markets worldwide.
The bear case
There are still risks to consider here. For one, the company has struggled with corporate governance issues. Large asset managers shunned the stock at the IPO due to how they perceive the company’s riders are treated. On Deliveroo’s website, it states that global rider satisfaction is 84%. I note that this is quite high, but it could certainly be improved.
There’s also the European Union’s planned change to the gig economy industry in which Deliveroo operates. This will mean some workers, such as the company’s riders, will be classified as employees, rather than being self-employed as they are now. This will give the workers more rights and benefits, which seems like a positive step to me. However, Deliveroo has said that this will impact its business and increase uncertainty.
The company is already loss-making, and I expect this change to add further operating costs to the business. The forecast for this year alone is a net loss of £225m.
Deliveroo share price: is it now a buy?
I like what Deliveroo is trying to build here in terms of its growing network of partner restaurants and users.
However, weighing everything up, I view the shares as too risky for my portfolio as it stands. I’m in favour of the upcoming change to the gig economy, but I want to see how it will impact Deliveroo’s business first before I invest. The fact that the company is loss-making only heightens the risk.
So for now, it’s staying on my watchlist. I think there are better shares I could buy today.
Dan Appleby owns shares of London Stock Exchange Group. The Motley Fool UK has recommended Deliveroo Holdings Plc. 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.