I bought Deliveroo (LSE:ROO) shares back in 2021 when the company went public. Unfortunately, the share price has dropped by 66% over the past year. Even with a jump of 6% on Friday, the share price is at 86p, a long way off from the levels I bought at. So does it make sense for me to buy more shares in the business to average my purchase price lower?
The case for steering clear
The main risk comes if I invest more and the share price continues to fall. But will this happen? It might. Several issues have contributed to the tumble over the past year and they’re ongoing.
One has been the cost of living crisis. The spiraling inflation rate means consumers are cutting back on non-essentials. This is even causing some people to think that the stock market could crash.
While I wouldn’t call Deliveroo a luxury service offering, it certainly isn’t a staple. In fact, getting a takeaway or having the groceries delivered is one of the first things that can be cut from a household bill. Instead, people can cook at home or go to the supermarket themselves. This ultimately reduces demand and revenue for Deliveroo.
Another reason for the slump in Deliveroo shares has been reputational damage regarding its riders. There have been multiple issues raised in the past year about the lack of support around sick pay and holiday pay, or even the requirement for a minimum wage. I understand that Deliveroo is a corporate entity focused on profits, but when this comes at the expense of worker rights, it can backfire.
Why I might buy more Deliveroo shares
Yet I could significantly reduce my break-even price if I buy more. From my original purchase price of 390p, buying more now would reduce my average price to 238p. This is an investing technique I’ve used successfully before. If the share price rallies from here, the profit from my position at 86p offsets the loss at 390p. This means I could sell at 238p and not take a loss overall (or hold. After all, I’m a long-term investor).
The share price could rally from here if the business continues to grow revenue and has an expectation of breaking even. So far, I have faith in the business. Q1 results highlighted that the number of UK orders grew by 20% versus the same quarter last year. For international markets, it grew 16%.
This impresses me. We still had some lockdown restrictions in Q1 2021 but the elevated order total from that period was still eclipsed in the quarter just gone. If this continues, it should only be a matter of time before this translates to a profit on the bottom line.
I think the diversification in target clients could also yield benefits in the future. The business is pushing for deals with restaurants, supermarkets and other partners (like WH Smith). The broader the base can be, the less reliant the company is on one particular segment.
So, will I buy? I think I will at some point in the future, but I don’t think now is the right time. With the uncertainty around the cost of living crisis at the moment, I’d prefer to put my free cash into more defensive options.
