Over the past year, the Deliveroo (LSE:ROO) share price has been decimated. It’s down 70%, closing Friday at 84p. I’ve owned the stock since it went public, so am nursing a large unrealised loss. This got me thinking. What if I invested an extra £500 now in Deliveroo shares? Here’s the potential I see for the next year.
The case for large upside
The highs over the past year are 327p. So, let’s be clear from the beginning, my £500 has the capacity to easily double in value over the next year if anywhere near this level is seen again. It’s not like I’m buying the stock when it’s breaking into uncharted territory with all-time highs. Deliveroo shares have traded at that price within the recent past.
However, I’d need to see a change in the trend lower before I could remotely claim a £1,000 value by 2023. One avenue that could help to achieve this is the continued growth of partnership deals. In the H1 results, I noted a push for new deals with McDonald’s, Lloyd’s Pharmacy and Waitrose. As these deals bed in, I think there’s large potential. The business is being transformed from just servicing restaurants to now also grocers, a wider variety of fast food outlets and pharmacies.
I think that the current share price is reflecting an overly pessimistic pandemic hangover. I recall a lot of people saying that as we came out of the lockdowns, Deliveroo would struggle to maintain order levels and transaction values. This has been disproved so far in 2022. H1 orders actually grew by 10% versus the same period in 2021.
If this pandemic stigma starts to wear off, investors could buy Deliveroo shares as they factor in that this business wasn’t just a lockdown hit. Rather, it has the ability to grow even in the post-pandemic age.
Concern around Deliveroo shares
Despite my optimism, it’s clear that the broader market doesn’t agree with me. The fall in the share price (particularly over recent months) has been very noticeable.
One of the reasons why a £500 investment might not be worth much in the future is due to the valuation. At the initial public offering (IPO), the business was forced to offer shares at the lower end of the expected range at 390p. Even at this price, I look back and think the valuation of the business here was too high. Put another way, it was too optimistic to start trading at 390p given the fact it was still loss-making and was in the pandemic storm.
Therefore, with a current market capitalisation of £1.65bn, today’s share price might be a truer representation of the value.
I’ve decided that I’m not going to invest £500 at the moment. I do believe the long-term share price should be higher than current levels, based on the success of new partnerships. But in coming months, I don’t see anything that would stop the trend lower continuing. Even in a year’s time, I struggle to see a £500 investment giving me any kind of decent return.
