Is now the time to buy Deliveroo shares?

Deliveroo’s share price has fallen by a huge 30% in 2022. Has this created a fantastic buying opportunity? Edward Sheldon takes a look.

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Shares in Deliveroo (LSE: ROO) have underperformed in 2022. Year to date, the food delivery company’s share price is down about 30%. That’s a disappointing result for investors.

In the past, one of my concerns about Deliveroo was the company’s valuation. However, after the recent share price fall, this is now significantly lower than it was. Is it time to buy this growth stock then? Let’s take a look.

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Is the growth story still intact?

Looking at the most recent trading update from Deliveroo, the growth story appears to be intact. This showed that gross transaction value (GTV) rose 36% year-on-year for the fourth quarter of 2021, and 11% sequentially, to £1.73bn. Meanwhile, orders for the period came in at 80.8m, up from 56.8m a year earlier.

I think this growth is very impressive, given that in late 2020, many countries were on lockdown. The numbers suggest Deliveroo still has plenty of momentum post Covid-19.

It’s worth noting that City analysts expect the company to keep growing at a healthy rate. For 2022, the consensus revenue forecast is £2.3bn, representing growth of around 27% on the top-line figure expected for 2021.

This is all very encouraging, in my view.

Is the company making any money?

However, just because a company is growing rapidly doesn’t mean it’s a good stock to buy. We also need to look at profitability. If the company is losing a ton of money, it could be a poor investment.

Looking at analysts’ profit forecasts, the outlook here is not great. For 2021 and 2022, they expect Deliveroo to post net losses of £226m and £196m respectively. This lack of profitability adds risk to the investment case.

Are Deliveroo shares cheap?

Of course, we also need to look at the valuation. If I overpay for the stock, it could hurt me. Deliveroo doesn’t have a P/E ratio because it doesn’t have earnings. However, it does have a price-to-sales ratio and that’s 1.2 on a forward-looking basis.

That valuation strikes me as quite low. By contrast, rivals Doordash and Just Eat currently have price-to-sales ratios of around six and two respectively. So on a relative basis, Deliveroo looks cheap.

What are the risks?

Finally, we need to look at the risks here. Is there anything that could derail the growth story or impact the company’s profitability?

Well, one risk is new regulation in Europe. Right now, the European Commission is reportedly planning new rules that would force Deliveroo and other gig economy companies to reclassify some of their workers as employees. This is a concern as it could raise Deliveroo’s costs significantly.

Another risk is competition from rivals such as Uber and Just Eat The issue here is that there’s nothing to stop consumers switching between platforms. That’s not ideal from an investment perspective.

Deliveroo shares: my call now 

Putting this all together, Deliveroo is not a buy for me right now.

Yes, the company is growing. And yes, the valuation seems reasonable. However, to my mind, the risks here are quite high. All things considered, I think there are better stocks to buy today.

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Edward Sheldon 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.

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 considered, so you should consider taking independent financial advice.

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