Around 120p, the Deliveroo (LSE: ROO) share price is way down from its peak of near 400p it achieved in August 2021.
But City analysts think positive earnings could arrive in 2024. And a return to 200p is not out of the question in the coming months and years.
The food delivery company arrived on the London Stock Exchange on 31 March that year with an initial public offering (IPO) price of 390p per share. But the stock crashed on the first day to about 290p. And after a bounce higher it collapsed even further to current levels.
It was one of the worst-performing IPOs ever! And right from the start, investors questioned the company’s profit predictions and forecasts.
Plagued by lack of earnings
The big problem for the business is a lack of earnings. Although the IPO was in 2021, the business was established around 10 years ago. And revenue growth has been robust with strong advances from year to year as the business expanded internationally.
But profits are elusive. Even if the ink turns from red to black in the accounts, it seems almost certain this will prove to be a low-margin business. There’s only so much money that can be skimmed from your typical tikka masala without customers baulking at the excessive cost.
Deliveroo looks like a commodity-style business rather than a potential high-earning enterprise with a strong competitive advantage.
However, there’s no denying the large and growing culture for delivered groceries and takeaways. Ordering delivered food is a way of life for many people. And that trend looks set to continue and grow.
The company has been building its network of food suppliers and establishing trust and strong trading partnerships for around a decade.
During that time, it’s been nipping and tucking operations to optimise efficiency. And it even rolled back from some territories and reined in its own expansion to focus on profitability.
A competitive space
But the food delivery space is crowded. And customers in many geographies can choose between several companies. Such competition is a recipe for modest profit margins ahead.
However, analysts predict positive normalised earnings of around 1.06p per share in 2024. And if earnings are about to turn positive, the company could build on the situation in the years ahead.
The share price has actually been creeping up in anticipation from a low point below 80p in the autumn of 2022.
There’s valuation risk here though. The forward-looking earnings multiple when set against earnings expectations is in three figures. There’s still a long way to go before Deliveroo can justify its valuation against earnings.
Speculation may drive the stock back to 200p. But there isn’t much to become excited about in the third-quarter trading update, released on 19 October.
Mentions of earnings are absent from the report. Although the company expects the weaker measure of adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) to be in the range of £60m-£80m for the full trading year to 31 December.
For me, this is a business to watch for the time being. And I’d like to see established earnings before entertaining the stock for my portfolio.