The Deliveroo (LSE: ROO) share price has plunged around 45% this year, extending losses recorded over the past 12 months. The stock has dropped 62% over the past year.
It seems to me as if there are a couple of reasons why the market has been dumping the stock over the past 12 months. These are a combination of short-term factors and long-term structural issues, which may take longer to rectify.
Deliveroo share price outlook
When the company first hit the market, I was sceptical it could meet lofty growth expectations. However, as the group navigated the pandemic and emerged stronger on the other side, I changed my opinion of the business.
It looks to me as if consumers have changed their buying habits. They are willing to spend more time ordering food on delivery apps than they were pre-pandemic.
This trend has not changed. Trading updates from across the industry show consumers are still spending on these platforms, and spending is increasing.
Unfortunately, these companies are still locked in a battle for consumers’ eyeballs. This battle is consuming increasing amounts of capital as companies like Deliveroo spend heavily to try and entice consumers to their platforms.
It does not look as if these challenges are going to let up anytime soon. At the same time, these companies are facing stricter regulation from authorities who want to clamp down on so-called gig economy workers.
This employment structure is the lifeblood of the food delivery sector. These risks, combined with a general investor apathy towards technology stocks, have hit the Deliveroo share price over the past 12 months.
Long-term headwinds
While poor market sentiment towards the company and its peers is a short-term factor, the longer-term challenges regarding employment regulation and competition or not going to go away any time soon.
Based on these factors, I am a bit concerned about the outlook for the business. I had assumed that rising turnover and competitive forces would lead companies to merge and improve the competitive landscape.
This has not happened and the landscape has only become more competitive.
On top of this, regulators’ efforts to clamp down on the gig economy could have a huge impact on the group if it has to pay more for staff.
That said, it is notable that consumers are still using Deliveroo and its peers and in growing numbers. This implies the business has room to navigate any forced changes in its business model.
Considering these factors, while I remain cautiously optimistic about the outlook for the Deliveroo share price, I do not think it is going to recover from recent losses any time soon.
I would still buy the company as a speculative investment for my portfolio. But I think the asset is unlikely to achieve substantial positive returns any time soon.
