Deliveroo (LSE: ROO) shares have tanked massively since IPO in 2021 and they’re now sitting down 70% from previous highs. But with a good growth story and the shares not much over £1, this cheaper share price might prove to be a bargain. Is it a buy for me?
The first reason I’m looking at this stock is the cheaper price. Deliveroo shares closed on IPO in 2021 at 282p before growing to 390p during the pandemic. Now, the price is only 115p which means I could buy in for around a 70% discount from its all-time high.
How cheap is that? Well, I can’t find a valuation based on earnings as the firm is still in its pre-profit stage. It’s currently valued at £1,999m which neatly matches its 2022 revenue of £1,974m. That makes a price-to-sales ratio of one, which I see as reasonable for a company the CEO Will Shu recently said is “early in the journey”.
And the company has been growing significantly. Its business model of delivering from restaurants to customers using an app has been growing revenues at a five-year average of 30%. Last year, which saw the end of the pandemic and presumably fewer food delivery orders, the firm still posted a 7% increase.
Deliveroo has good cash on hand too. With about a billion in net cash, I figure there’s another four years before any shares I buy would be at any risk of dilution.
Where are the profits?
Four years sounds like a decent amount of time, but it’s not helped by a challenging environment. Rising costs, inflation, and the cost-of-living crisis could all see margins squeezed in the coming years.
This is reflected in its latest update. For Q1, monthly active customers hit 7.1m, down from Q1 2022’s 7.6m and also Q4’s 7.4m. If this is a sign of things to come, I’m not sure I’d want to buy in here.
And if growth is slowing, when will the profits arrive? Deliveroo needs to make its margins positive somehow. Increasing fees is risky and could drive away customers. And I can’t see it freeing up funds from its payroll, as it has already made headlines for paying drivers below minimum wage.
That last point leads me to the regulatory risk here. The company pulled out of Spain recently after the government gave more employment rights to ‘gig economy’ workers. What if the UK, which makes up about 60% of users, followed suit? Would that be the end for any shares I buy?
Am I buying?
More generally, I’m not seeing a moat here. There are other food-to-go delivery services. Similarly, the firm has little in the way of assets. That was the big undoing of WeWork, which was once a market darling.
As much as I like finding growth-oriented UK shares, I think there’s too much risk here. And with the markets taking a hit recently, I think there are better value buys to be had.
