After a huge fall between mid-2021 and mid-2022, the Deliveroo (LSE: ROO) share price has begun to recover lately. Over the last year, it has climbed about 50%.
Now, this share price recovery could have further to go. However, I’d rather buy shares of a key competitor.
Still growing
Deliveroo’s recent Q3 trading update was solid, given the challenging consumer backdrop.
For the quarter, gross transaction value (GTV) was up 5% year on year while revenue was up 3% at constant currency.
The company noted that growth trends were underpinned by an expanded selection, targeted promotions, and service enhancements.
Looking ahead, management was confident about the future.
“My confidence in our ability to drive growth and deliver on our goals for profitability and sustainable cash flow generation has never been stronger,” said founder and CEO Will Shu.
So, the growth story here appears to be intact.
What turns me off Deliveroo shares, however, is the lack of real profits.
This year, Deliveroo is expected to generate negative earnings per share.Meanwhile, next year, the earnings forecast is only 0.081p.
That puts the forward-looking P/E ratio at about 1,720 right now.
Given the lack of profits and the sky-high valuation, I don’t see a lot of appeal in the stock at the moment.
A better stock?
One stock in this industry that does look appealing to me right now, however, is Uber Eats owner Uber (NYSE: UBER), which is listed in the US.
From an investment perspective, Uber strikes me as a more attractive proposition than Deliveroo.
For a start, it has a more diversified business model.
With Uber, I get exposure to rideshare (a key part of the travel industry), food delivery, freight/logistics, and digital advertising.
Second, it’s growing faster. Earlier this week, the company reported growth of 11% for Q3.
It’s also now profitable and generating a lot of cash. For Q3, the company posted net income of $221m and free cash flow of $905m.
As a result of this profitability, the company is set to join the S&P 500 index soon. This should increase interest in the shares as Uber will be classified as an Industrial stock and I think this will interest a lot of institutional investors.
As for the valuation, it’s a lot lower than Deliveroo’s. Looking at the earnings forecast for 2024, the forward-looking P/E ratio is 47.
Of course, this stock has its own risks.
This year, Uber shares have enjoyed a strong rise, almost doubling. After that kind of jump, there’s always the risk that some profit-taking will send the price lower.
But given that the company’s market cap is only around $100bn (quite small for a US tech firm), I’m optimistic that it can go higher in the medium to long term.
It’s worth noting that analysts at KeyBank just put a $60 price target on the stock. That’s about 20% above the current share price.
