Can the Deliveroo share price break out of the downtrend?

Jon Smith explores two factors that could help to lift the Deliveroo share price out of the recent move lower, but also cites some key risks.

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In a remarkably linear fashion, the Deliveroo (LSE:ROO) share price has fallen since the start of December. In fact, over this period the shares have lost more than 50% in value. From the IPO price just under a year ago of 390p, it currently trades at 118p. Stuck in a downtrend, what could be a positive catalyst to turn things around?

Concerns around finances

One of the key points that many investors face with growth stocks is that the company might be doing well on non-financial metrics, but is loss-making. The decision is whether the company is worth an investment based on the future potential for the business. In some ways, the share price simply reflects a multiple of the future earnings value, discounted back to today.

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As for Deliveroo, ahead of the full-year results due later in March, it looks likely that a loss of around £200m will be posted. Some analysts don’t expect a profit to be made in 2022. The fall in the Deliveroo share price in recent months reflects the realisation that it might take longer than expected for the company to break even.

So in terms of when or what could help Deliveroo shares to break higher, profitability definitely comes to mind. If management shows that the path to becoming profitable is going to come faster than currently expected (beyond 2022 at least), this could help inject life into the shares. 

International growth

In the Q4 2021 update, the growth in international gross transactional value (GTV) orders rose. It jumped 36% on the same quarter of the previous year, and was also up 10% from Q3. 

The firm is exiting the Spanish market, noting in the report that “the company determined that achieving and sustaining a top-tier market position in Spain would require a disproportionate level of investment.

I actually think this is a positive, showing that management is aware of where it can get good returns on investments. Deliveroo still has the potential to expand into new markets in Europe and beyond, of course. And if investment in new markets starts to bear fruit one day, I think this could help the shares to move higher and out of this downtrend.

Risks for the Deliveroo share price

I think the above two reasons could both help the share price. However, I do need to be realistic about the risks the company faces. There is stiff competition, particularly in the UK, for fast delivery. The market is becoming saturated with similar companies, which usually means that margins get squeezed in order to remain competitive. Therefore, Deliveroo needs to look abroad or for other differentiating factors and that will be challenging.

With these risks managed, I personally think that Deliveroo shares could well achieve a turnaround later this year. Therefore, I’m considering buying more shares.

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Jon Smith owns shares in Deliveroo. 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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