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The Deliveroo share price falls: I’m not buying yet

Image: Deliveroo

The London flotation of food delivery services Deliveroo Holdings (LSE: ROO) got under way last week with an almighty flop. Investors in the IPO were sold shares at 390p, but the Deliveroo share price fell 30% to 286p on the opening day of trading.

However, Deliveroo is one of the market leaders in the food delivery market, which seems likely to continue growing. The firm has also secured the backing of US giant Amazon, which invested in 2019 and continues to own a 12% stake in the business.

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Is this a buying opportunity? I don’t know. One option for me would be to buy a few ROO shares today and tuck them away for a few years.

A long-term opportunity?

I can see how this business could become a long-term money-spinner. If the urban trend towards small, frequent deliveries of food and other goods continues, demand for Deliveroo’s services could grow. Its share price could follow.

On the other hand, Deliveroo has been in business for eight years and still hasn’t turned a profit. Even though sales rose by 54% to £1,190.8m in 2020, Deliveroo still lost £2.25 for every £12 of sales.

I’m not sure how the company will ever become profitable enough to justify its £5.5bn valuation. My particular concern is that costs will always rise in line with sales. After all, a cyclist can only make so many deliveries in an hour. Recent moves to give gig workers the same rights as employees could increase labour costs even further.

I could be wrong

Of course, many successful tech businesses have been loss-making for years before turning a profit. It’s fair to say that many people who are smarter and better-informed than me have chosen to back Deliveroo.

I may be underestimating the potential of this business. It wouldn’t be the first time that I’ve failed to see the growth opportunity in a company I’ve looked at.

For example, one possibility might be that Deliveroo will start licencing its technology to other companies. The firm’s software links restaurants, couriers, and customers seamlessly, providing real-time updates while using machine learning to maximise courier productivity.

I can see that Deliveroo might end up being a bit like Ocado. The online grocer started out running its own home delivery service but is now also focused on building automated warehouses for other retailers.

Deliveroo share price: what I’m doing

As a private investor, I only have a limited ability to diversify my investments. I can’t own hundreds of shares and I don’t have other people’s money to play with.

When I make an investment, I want to have a clear idea of what kind of returns it’s going to provide. I wouldn’t buy a house to rent out without an idea of the likely rental income. When I buy shares in a company, I make sure I understand its ability to generate profits and pay dividends.

Deliveroo doesn’t meet these requirements. It’s loss-making and as far as I can see, has no immediate route to profitability.

I could be missing out on a future big winner — but who really knows?

At the current share price, Deliveroo is too speculative for me. I can’t afford to sit on a loss-making investment for years in the hope that it might come good. I’m staying away for now.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Ocado Group and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.

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