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I’m going to avoid the Deliveroo share price until this happens

Image: Deliveroo

I think it’s fair to say the Deliveroo (LSE: ROO) share price has been a bit of a flop. Indeed, the stock is currently sitting around 25% below its IPO price.

However, it isn’t easy to understand precisely why the stock has performed so poorly. Some have blamed the banks that managed the group’s IPO process. Others have cited the decision by large investors to avoid the company due to ethical concerns.

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A waning investor appetite for high-growth stocks and the company’s excessive valuation has also been blamed for the flop. 

But I’m not interested in what has happened. I’m interested in what the future holds for the business. This will determine my decision as to whether or not I should buy the company for my portfolio.

The Deliveroo share price outlook

The pandemic has been a boon for meal delivery companies like Deliveroo. Consumers stuck at home with little else to do have been happy to spend money on takeaways and drinks. 

Last year, the company’s sales surged 64% to £4.1bn. Despite this impressive growth, the group posted an underlying loss of £224m for the period.

The company has been investing heavily in growth over the past 12 months. It has doubled the number of delivery drivers to 110,000 and expanded into new areas such as grocery delivery.

Also, the firm now offers a ‘White Label’ service, where restaurants can use Deliveroo, but with their own branding.

For customers who regularly use the platform, the business has also expanded its ‘Deliveroo Plus’ subscription service, which offers free delivery in return for a monthly subscription.

These initiatives have helped cement the company’s position in the market, and management will be hoping they help support the share price. 

Competitive market 

Deliveroo isn’t the only organisation grappling for consumers. Uber Eats and JustEat are investing heavily to attract new customers to their platforms and drive repeat business.

For example, Just Eat posted substantial losses of £126m in 2020, up from £75m the year before. Losses rose as the amount spent on marketing increased 158% to £315m

Put simply, all of these companies are growing, but they’re having to invest heavily to achieve this growth. The only real stakeholders benefiting from this fight are consumers, who are constantly bombarded with offers and discounted delivery. 

This may last for some time. All three companies have deep pockets, which suggests they can sustain losses for years. However, investors will likely end up footing the bill in the fight for sales growth. 

As such, I’m going to avoid the Deliveroo share price until such time as the market reaches a stage of maturity and companies stop focusing on growth at any cost. 

This could take a long time, and I may miss out on some profits. However, I’m just not comfortable backing Deliveroo at this stage. The food delivery market is incredibly competitive, and until that changes, it’s difficult for me to tell which company will ultimately succeed.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Just Eat N.V. 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.