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Deliveroo shares are bouncing back. Should I buy?

Image: Deliveroo

Deliveroo (LSE: ROO) shares fell sharply immediately after its IPO, which grabbed widespread media attention. That was due to the brand’s high profile, the large value of the IPO, and the scale of the losses.

But it also generated headlines as it was one of the first companies to list after rule changes. These changes created a dual structure allowing founder and CEO Will Shu to hold on to more control of the company than would have previously been permissible.

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Since that well publicised initial crash, and while it’s still very early days for Deliveroo as a listed company, the shares have staged a partial comeback. So does this high-growth company merit being added to my portfolio?

Deliveroo shares – Q1 trading

Guidance and results from the company on the face of it might suggest so. Just this week, the technology-to-food-delivery firm left its full-year guidance unchanged as it reported a more than doubling of orders in the first quarter.

Deliveroo said orders rose 114% to 71 million in the three months to the end of March from a year earlier. The value of customer transactions rose 130% to £1.65bn.

Growth was strong both in the UK/Ireland and also internationally. In the UK/Ireland, orders rose 121% to 34 million and transaction values increased 142% to £852m. International orders increased 108% to 37 million and the value of transactions was up 119% to £794m.

That growth really underlines the biggest upsides for this stock, in my opinion. Its revenue acceleration both in the UK and overseas, combined with a well-known brand and money raised from the IPO to invest in further expansion are amongst its biggest strengths. It’s also backed by Amazon

What are the downsides?

The big negative though is that despite an increase in demand because of lockdown, Deliveroo has remained hugely unprofitable. As lockdowns ease and people go out to restaurants, there will likely be some loss of demand. That could delay profitability.

For me though, the biggest risk is competition. Just Eat and Uber Eats are among the big names in this space. And with barriers to entry relatively small, there could be more rivals, especially if the sector does become profitable. In its IPO prospectus, Deliveroo acknowledges that the market is highly competitive. At the moment I don’t see evidence that Deliveroo can beat its rivals, or that it does anything particularly different that would add long-term value for shareholders.

And I don’t really see Deliveroo as a tech company that demands a huge premium. It lacks proprietary technology and is effectively a middleman between restaurants and customers. It’s developing its business model and innovating, but at its core, it’s not a sophisticated new technology for investors to get excited about.

The threat of regulation and continued negative publicity around the treatment of riders could also hold back the share price. Big investors like Legal & General announced they would avoid the IPO on ESG and workers’ rights grounds.

Overall a combination of unprofitability, high competition and possible regulatory changes, mean I’ll be avoiding Deliveroo shares. From my perspective, there are better UK-listed growth stocks.

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Andy Ross owns shares in Legal & General. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Just Eat N.V. and Uber Technologies 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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