Can the Deliveroo share price recover from penny stock levels?

Can the Deliveroo share price recover from penny stock levels, with soaring high inflation and pandemic tailwinds gone?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A Deliveroo rider on the move

Image: Deliveroo

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Key Points

  • Despite a decent set of Q1 results, the Deliveroo share price continues to fall.
  • I think the new partnership with McDonald's is going to boost Deliveroo's top line.
  • A potential recession could delay profitability timeline.

Since the company’s initial public offering, the Deliveroo (LSE: ROO) share price has plummeted by more than 70%. The shares are currently trading for less than £1, which makes me wonder whether they can recover from these levels.

Deliveroo results

Despite reporting a decent set of Q1 results, the Deliveroo share price continues to fall. Orders, gross transaction value (GTV), monthly active customers (MAC), and average monthly order frequency all saw healthy increases. And although GTV per order saw a decline, this was attributed to the artificial spike from the pandemic, as the figure actually returned to pre-pandemic levels.

Deliveroo Metrics for Q120212022
GTV per Order£23.20£21.70
Average Monthly Order Frequency3.33.4
Source: Deliveroo Q1 Trading Update

Based on the data, it seems to me that Deliveroo’s business is more volume-based than quality-based. As such, its focus will be to recruit more customers, rather than getting customers to spend more per order.

Hopping to great heights

Since 2015, Deliveroo’s UK market share has grown to an impressive 22% from 5%. The food delivery service has managed to continue snatching market share away from its biggest competitor, Just Eat, and looks towards possibly overtaking in the future.

Source: Food Delivery App Report 2022

One of the main reasons for Deliveroo’s aggressive growth has been its key partnerships. In the last year, it has partnered with the likes of WH Smith, Sainsbury’s, Waitrose, Morrisons, and Carrefour. These partnerships have allowed the firm to deliver fresh groceries and even appliances, thus expanding its product offering.

Not to mention, its strategic collaboration with Amazon has provided a surge of new customers. Amazon Prime users are eligible for free Deliveroo Plus perks, such as free delivery. As a result, Deliveroo saw its MAC increase by a million over the last year.

More excitingly, the firm recently announced a new partnership with McDonald’s, with a roll out expected in Q2 2022. Given that McDonald’s contributed to over 60% of Uber Eats’ sales in 2020, I have no doubt that the fast food chain is going to boost Deliveroo’s top line.

Cash-rich pouch

All that being said, Deliveroo has got to buckle up. The company no longer enjoys pandemic tailwinds as workers return to the office, and inflation continues to run rampant. Real wages are continuing to decline and a recession is being pencilled in for later this year.

Fortunately, Deliveroo sits on a large pile of cash at £1.3bn with zero debt. It only burnt through £224m in 2021, giving it a cash runway of about 5.8 years. Given that management expects to achieve breakeven on an adjusted EBITDA margin by 2024, this shouldn’t be a problem. However, a potential recession could push its timeline backwards and sour investor sentiment even further.

Although Deliveroo expects to be profitable by 2026, a 6% EBITDA margin is rather slim. Moreover, it faces tough competition from Uber Eats, which recently launched its own free delivery subscription to compete with Deliveroo Plus.

Analysts aren’t forecasting Deliveroo to be profitable within the next three years either. Therefore, I’m not expecting the Deliveroo share price to recover from penny stock levels any time soon. So, even though Deliveroo’s partnerships bring exciting times ahead, I’m not a fan of its low-margin business model, nor its shares for the time being.

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 assessed. Consider taking independent financial advice.

John Choong has no position in any of the shares mentioned at the time of writing. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon, Deliveroo Holdings Plc, Just Eat N.V., and Sainsbury (J). 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.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »

Investing Articles

If I’d bought Rolls-Royce shares a year ago, here’s what I’d have now

Rolls-Royce shares have been the big FTSE 100 success story of the past 12 months and more. And there's still…

Read more »

Young female analyst working at her desk in the office
Investing Articles

If the Dow’s heading for 60,000 by 2030, can the FTSE 100 index hit 12,000?

Strategist Ed Yardeni predicts a 50% rise for America’s Dow Jones Industrial Average over six years. Can the FTSE 100…

Read more »

Investing Articles

Is the National Grid share price a once-in-a-decade opportunity?

The National Grid share price looks like a bargain. But there’s much more for investors to think about than a…

Read more »

Investing Articles

Here’s why the Rolls-Royce share price should keep gaining!

The Rolls-Royce share price is up 185% over the past 12 months, but there are a host of tailwinds that…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Buying 1,852 shares in this ultra-high yield FTSE 100 income stock would give me £1k a year

Harvey Jones is keen to load up on this blue-chip income stock that pays the highest yield on the FTSE…

Read more »