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I was right about the Deliveroo share price. Here’s what I’m doing now

A Deliveroo rider sprinting on a bike
Image: Deliveroo

Almost two months ago, I suggested that the Deliveroo (LSE: ROO) share price could stage a brief rally as the firm reported on earnings over its third quarter. This duly happened. At the same time however, I also felt the takeaway delivery firm was in no way a bargain due to the many headwinds it faced. 

Post mini recovery, the valuation of Deliveroo has dropped back again. In fact, it’s now hit levels not seen since the end of April, following its disastrous IPO. Could it fall further moving into 2022? And would I be a buyer if it did?

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Gig workers rule

The latest obstacle faced by the company is news that the European Commission has drafted news rules for gig workers. These would compel firms like Deliveroo to classify their drivers and riders as employees, entitling them to a minimum wage, pension and paid holidays. To date, these businesses have regarded workers as independent contractors.

As you might expect, such a move would mean far higher costs for ROO and its rivals. And while some of this can be passed on to the customer, there’s clearly a limit on what they’ll be prepared to pay.

Right now, nothing is set in law. However, the 20% fall in the Deliveroo share price in the last month suggests investors are once again wary. 

Will the Deliveroo share price fall further?

There’s certainly nothing to stop things from getting worse before they get better. It’s not just the threat of new legislation either. Like many highly-valued stocks across the pond, Deliveroo remains unprofitable. That could prove very unattractive to investors if inflation were to force a hike in interest rates. Even if this doesn’t happen soon, the sheer amount of competition Deliveroo faces can’t be ignored. If it possesses an economic moat, I’m struggling to see it.

It’s also worth mentioning that Deliveroo’s free float (the number of shares available on the market) is pretty low for a company of its size, at just 70%. This means its stock has the potential to be more volatile than other UK heavyweights. 

Reasons to be cheerful

Of course, no one has a crystal ball. While my call in October turned out pretty well, it was little more than educated guesswork. And there are certainly reasons for thinking the Deliveroo share price could stage another recovery as we move into 2022.

The emergence of the Omicron variant, for example, has already pushed the number of people dining out down to its lowest levels since May. That could/should be beneficial to Deliveroo, just as it was during the three national lockdowns. People still need to eat and a takeaway is an affordable luxury to raise the spirits in the dead of winter.

It’s also worth highlighting that, due to legal challenges, it will probably be a good while before Deliveroo needs to factor the aforementioned gig worker rules into its business plan. This delay could prove profitable for traders, albeit less so for long-term investors like me. 

Still overvalued

To be clear, I’ve nothing against Deliveroo as a company. I’ve used its services on a few occasions and been more than satisfied. At £4bn, however, it still looks overvalued to me. Lose another 50% and that view might change. For now, I’m maintaining my wide berth. 

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Paul Summers has no position in any of the shares mentioned. 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.

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