Has the Deliveroo share price bottomed?

The Deliveroo share price (LON:ROO) is down nearly 60% in 2022. Paul Summers asks whether it’s now hit bargain territory.

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When I last looked in April, I speculated whether the Deliveroo (LSE: ROO) share price would drop below £1. Although short-term movements are near-impossible to reliably predict, I felt that it was (very) possible.

Fast forward a couple of months and the stock now changes hands for 85p a pop. The sustained tumble in 2022 to date leaves the takeaway delivery firm with a market capitalisation of £1.5bn.

Have we seen the bottom? Again, we can only speculate. But here are a few reasons why I suspect it could go either way.

The Deliveroo share price fallen too far

First, it’s clear that its business isn’t bad. Orders rose 18% in Q1 to 82.4m. Gross transaction value (GTV) in the first three months of 2022 also increased, by 11%, to £1.79bn.

Deliveroo is also continuing to partner up with other companies. Most recently, it announced a rapid grocery delivery tie-in with Spar. Assuming a trial is successful, products from the latter’s near-2,200 stores will be delivered by the former. Ultimately, Deliveroo’s ability to sign more and more of these deals will give it earnings diversification. In theory, this lowers the risk for me as a potential investor.

Positively, the company doesn’t appear all that popular with short-sellers either. These are traders who believe the Deliveroo share price is destined to fall further and bet accordingly. Naturally, a lot of short interest in a particular stock isn’t a good omen. For example, fast fashion firm ASOS has high amounts of short interest and this is arguably reflected in its recent share price performance.

Reasons to steer clear

There are, however, still a few issues with the investment case, at least in my opinion.

The rise in living costs is just one concern. Yes, I know saying that people are feeling the pinch is hardly revelatory. However, my point is that things are likely to get worse before they get better. Inflation is likely to hit 11% later this year. That means discretionary incomes will be squeezed further. Accordingly, the number of takeaways people consume could fall significantly.

Another ongoing issue is the disputes the company has with its riders, and their pay. Knowing that a meaningful proportion of a company’s workforce is disgruntled doesn’t exactly fill me with confidence as an investor.

Last, the lack of a meaningful ‘economic moat’ — what could truly separate Deliveroo from rivals — still troubles me. What’s to stop someone with even bigger bucks from replicating the business model here?

Have I changed my mind?

I’ve long struggled to understand quite why Deliveroo has attracted so much attention from investors. Does that make me an eternal bear on the stock?

In a word, no. Like all investments, there’s money to be made but it really does depend on when I buy as much as what I buy. I reckon Deliveroo shares could prove lucrative in time. But I’m also inclined to think the firm faces an uphill battle, at least for a while.

Maybe this is already reflected in the price, maybe not. But is it worth the risk for me? Not with so many other quality shares available a knockdown prices.

I doubt Deliveroo can deliver for me just yet so I remain a watcher rather than a buyer.

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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS and 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.

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