Down 60%, are Deliveroo shares the FTSE’s biggest bargain?

With its share price down sharply since its IPO, could left-for-dead Deliveroo shares be the FTSE’s top buy for bargain hunters?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A mother and daughter collecting their home grocery delivery.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Its share price is down 60% since its stock exchange debut, so Deliveroo (LON:ROO) could be the FTSE‘s most overlooked stock. This once high-flying name has crashed hard amid concerns over slowed growth and profitability. But recent results revealed surging earnings, with the company seemingly having turned a corner.

Accelerated earnings

As a frequent Deliveroo user, it’s easy to attest that it remains popular despite consumers returning to restaurants post-lockdowns. The convenience of delivery keeps loyal customers hooked, and I feel its selection and reliability outpace competitors like Just Eat. Consequently, it’s no surprise to have seen the platform retain its users despite the current cost-of-living crisis.

Yet it should be noted that growth has been stagnant over the last couple of years in average monthly orders and monthly active customers. Unless this picks up, then this could represent a real risk to the shares’ future performance.

Additionally, the food delivery field is crowded with well-funded rivals, so profitability may be modest in the medium term.

However, if Deliveroo can continue to scale, I’m confident this should improve over time, especially if it ventures into the super app space like Grab. Developing a super app could unlock significant new verticals for the FTSE constituent. After all, Deliveroo is a household name in the UK, and that brand power holds plenty of value.

The company has been disciplined on the cost front. It’s been wisely exiting unprofitable areas to boost earnings in an attempt to turn a net profit — something no other food delivery company is yet to achieve.

As such, the board has upgraded its EBITDA guidance for the year significantly — from £20-£50m to £50-£60m. This is a rarity to see these days given the macroeconomic climate.

As mentioned, risks around growth and margins persist, of course. But with the stock so beaten down, I think most of this negativity is priced in already. Therefore, patient investors could be rewarded if the FTSE stalwart can sustain the upward momentum found this year.

Room for growth

As one of the early movers in food delivery, Deliveroo benefits from strong branding, consumer trust, and restaurant relationships built over the years. These competitive advantages can’t be easily replicated by newcomers.

Deliveroo’s delivery network also hums with hard-to-match efficiencies optimised over time. Management seems to be focused on balancing growth and profitability wisely. Investors may be happy to see the firm not chasing volume at all costs as it was before.

Although several analysts question whether increased competition spells doom for Deliveroo, there’s still room for optimism, I feel. As the saying goes, a rising tide should lift multiple boats. And with real wages now finally above inflation, a return to discretionary spending could bode well for the FTSE stock.

The food delivery market seems far from saturation as it still makes up less than 20% of UK restaurant spending, and is even smaller when it comes to groceries. So, as more customers try delivery and chains expand their partnerships, the entire sector could grow.

For contrarian investors, excessive pessimism often signals opportunity, and Deliveroo may be one opportunity. Nonetheless, until net profitability can be achieved, investors may not want to risk a sizeable chunk of their portfolios here. Even so, this growth stock may still be worth dipping a toe into.

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 assessed. Consider taking independent financial advice.

John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended Deliveroo Plc and Just Eat 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.

More on Growth Shares

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Lloyds shares could reach £1.50 in 2024

Lloyds shares rising from 43p to £1.50 in 2024 sounds like a tall order, but here is how the unloved…

Read more »

Investing Articles

Could Rolls-Royce retain its share price gain and more?

The Rolls-Royce share price has impressed in 2023. I particularly like management’s fresh impetus on quadrupling profits and sustainable aviation…

Read more »

Investing Articles

If my Dad had invested £500 in Rolls-Royce shares when I was born, here’s what I’d have now

Jon Smith considers how an investment in Rolls-Royce shares would have performed against other potential ideas from the 1990s.

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Could buying this EV stock be like buying Tesla in 2016?

Popular EV stock NIO is currently priced around the same level as Tesla in 2016. This Fool assesses if now…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot growth stocks that exploded 21%-30% higher in November!

Ben McPoland looks at a pair of incredible growth stocks listed in the UK and US that each surged by…

Read more »

Yellow number one sitting on blue background
Growth Shares

If I could only buy one FTSE stock in 2024, this would be it

Jon Smith reveals the FTSE 250 growth stock that would be the one he'd pick if he could only buy…

Read more »

Investing Articles

The Rolls-Royce share price won’t stop rising. Am I missing out by not buying?

It's been an exceptional year for the Rolls-Royce share price and this Fool fears he's been missing out. But is…

Read more »

Investing Articles

These two FTSE 100 stocks are on the rise – is now the time to buy?

As the mining sector enjoys a boost from China, this Fool UK contributor has his eye on two promising FTSE…

Read more »