The pandemic threw up plenty of surprises for all of us. In terms of stocks, some businesses performed well with the lockdowns. One example was Deliveroo (LSE:ROO). I daren’t think of the amount of takeaways I ordered, and I’m sure I’m not alone! Yet with a steep fall in the FTSE growth stock from 2021 onwards, it has traded quietly in recent months. Here’s why I think it could be set to jump this year.
Starting with the problems
To begin with, I completely understand why the share price is down 63% over the past two years (and 14% over the past year). The business was able to take advantage during the pandemic, but as this eased off, customer demand fell.
Despite new initiatives, such as developing partnerships with the likes of Waitrose and Lloyd’s Pharmacy, investors continued to shy away from buying the stock.
Fundamentally, for each of the past three years, the business has lost over £200m in profit before tax. Regardless of what new marketing push or partnership has been announced, it hasn’t translated to the bottom line.
The path to profitability
The first reason why I feel Deliveroo shares could be back on the menu is a strategy shift. The annual report released earlier this year was entitled “The path to profitability”. The leadership team gets it, and understands that investors need to see a profitable company going forward.
Positive signs are already emerging. In H2 2022, the adjusted EBITDA margin (as a percentage of the average gross transaction value) was 0.2%. This might sound complicated, but it basically means that the company can be profitable going forward as the margin is above zero.
This might not sound like a big deal, but it is when I realise that this margin has been negative for Deliveroo for quite some time. It paves the way for the company to make a profit in the future.
Getting the basics right
Another key factor is that the business is already cutting costs. This included letting go of 350 employees (9% of the workforce) and other measures to reduce expenses.
Reducing costs is key to making a profit, but what about revenue? For 2022, revenue grew 14% year on year. So this is also moving in the right direction.
A similar jump in revenue this year, combined with lower costs might not be enough to flip it to a profit, but it certainly will narrow the loss from previous years. For investors, seeing signs of losses becoming smaller should be enough to spark interest in buying the stock again.
Time to wake up
Some investors might be sceptical about investing now based on the potential for Deliveroo to become profitable. Yet consider if later this summer, the company issues a strong trading update. In the autumn, it upgrades earning forecasts. By then, the share price will have likely already jumped considerably!
In order to reduce risk, an investor can use pound-cost-averaging. This involves buying the stock multiple times, such as every month. In this way, it gives a blended average price, instead of committing everything in one go. For Deliveroo shares, I think this is a smart idea.
