There were high hopes at IPO time in March 2021. But despite early gains, the Deliveroo (LSE: ROO) share price today is down 78% from its offer price. Much of that, 65%, has come in the last year.
As with many market entrants in a popular new business, I think early adopters pushed the shares too high. But I wonder if they’ve now been pushed too far in the opposite direction, and if investors could be looking at a buying opportunity.
Deliveroo initially enjoyed a big pandemic boost. And I think the market can only grow in the long term. But orders were always going to fall back once Covid restrictions eased. But I think early investors priced Deliveroo shares as though it wasn’t going to.
Deliveroo share price correction
So I am convinced that a correction was needed, and that the Deliveroo share price fall is at least partly justified.
Deliveroo aims to reach a breakeven point by late 2023 or early 2024. And by 2026, the company hopes for an adjusted EBITDA margin of 4% or better.
So targeted profits are still more than a year away. But as we edge closer, and if quarterly updates show things heading in the right direction, I can see the Deliveroo share price rising again.
Judging by the first quarter this year, things are going well. It’s always going to be a low-margin business, and volume will be the key. And in this latest quarterly update, the company outlined its key progress on tie-ups with major sellers.
Partners are key
A collaboration with Amazon Prime has been expanded to France and Italy. More Deliveroo Hop sites have now been opened with Waitrose in the UK and Carrefour in Italy. And there’s a new pilot with WH Smith.
Before I get too upbeat, there are definitely clouds on the horizon. We have soaring inflation, rising interest rates, and a depressing worldwide economic outlook. Deliveroo is expanding its market share, but that market is facing a big cost-of-living squeeze. The last thing a low-margin business like Deliveroo needs is less spare cash in customers’ pockets.
But even in the face of that, the company still expects a 15-25% rise in gross transaction value (GTV) in 2022. I just fear that might be a bit optimistic.
Plenty of cash
On the balance sheet front, things look good. Unprofitable companies at this stage often rely on debt and on multiple share issues to raise the cash they need. But Deliveroo ended 2021 with no borrowings, and with £1.3bn in cash and equivalents on the books.
Unless things go wrong, that should easily be enough to keep the business operating until it gets past breakeven day, at current spend rates.
So what’s my bottom line here? I see plenty of uncertainty. And the economic outlook for the rest of the year could keep pressure on the shares. But if Deliveroo gets out of 2022 with its profitability targets intact, I think we could see this year as having been a good time for investors to buy.
