Deliveroo shares are trading for pennies! Here’s my game plan

Jon Smith gives his opinion on the slump in Deliveroo shares below 100p and whether he should buy more at the moment.

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At the start of the month, the Deliveroo (LSE:ROO) share price fell below 100p. As someone who has been since invested the IPO at 390p, this hurts to see. I think there are a few reasons for the slump to penny stock status. But it does raise the question of my game plan or what I should do given this fall in Deliveroo shares. Here’s my thinking.

Reasons for the Deliveroo share slump

One reason for the fall in the past month is due to Deliveroo being caught up in the general market sell-off. The company is categorised generally as a tech growth stock. Unfortunately, this area has been hit the hardest in the stock market rout being seen right now. Investors are clearly favouring pulling money out of perceived high-risk growth stocks and finding a home in safer havens. From this angle, Deliveroo shares aren’t being hit due to company-specific issues, but broader sector ones.

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There are some company-specific risks that are being noted. Aside from tougher competition, the outlook for the rest of the year flagged up in the Q1 trading update wasn’t overly positive. It noted that “the adjusted EBITDA margin (as a % of the gross transaction value) is expected to be in the range of (1.5)–(1.8)%”. Simply put, this needs to increase for Deliveroo to have any chance of performing well in 2022.

Finding value in the penny stock

The above points are of concern to me when thinking about buying more Deliveroo shares now. However, is a 65% fall in the past year really reflective of the business performance?

For example, despite the uninspiring guidance in the Q1 update, there were plenty of positives. The gross transaction value in Q1 2022 was up 12% on Q1 2021. This is even more impressive when I consider that several key markets were under lockdown restrictions in Q1 2021 (and so more likely to order takeaway).

The international side of the business is also growing. I think that will be a key source of profitability going forward. In Q1, international orders swelled 16% to 41.7mn versus the same period last year. It’s now higher than the UK & Ireland order figure of 40.7m. I also feel the competition in some international markets is nowhere near as sharp as that in the UK. So going forward, I could see this growth as helping profit margins improve overall.

What my game plan is

On balance, I don’t feel like I should add extra shares at the current level. I already have enough exposure to the stock relative to the rest of my portfolio. However, if I didn’t currently own any Deliveroo shares, then I’d be taking advantage of this move below 100p to buy some of the 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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