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Will the Deliveroo share price bounce back in 2021?

Image: Deliveroo

I think it’s fair to say the Deliveroo (LSE: ROO) share price has been a massive flop. Shares in the company promptly fell 30% when they began trading on the London Stock Exchange. And the selling has continued. The stock hit a low of 241p on 12 April, a staggering 38% below its IPO price. 

The question is, is this a temporary setback? Or was the Deliveroo share price wildly expensive in the first place?

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Long-term outlook

There are no set answers to these questions. However, by analysing how the company will perform over the long term, it should be possible to gain some idea as to whether or not the stock is over or undervalued at current levels.

Activity on the Deliveroo platform has surged over the past year. Consumers stuck at home have turned to the company to provide takeaway meals and deliver essentials. 

I don’t doubt that the demand for these services will continue past the pandemic. But what we don’t know is how big the market will be. 

There are currently three main competitors in the UK meal delivery market. Deliveroo, Just Eat and Uber Eats. All three of these companies are spending significant sums to try and capture market share. They’ve been spending so much that last year, which was possibly the perfect operating environment for these organisations, none made a profit.

This is worrying. If companies like Deliveroo cannot make money in a market where consumers have no other option but to use these platforms, we have to ask, when will they make money?

I think this is the primary reason why the market has been so sceptical of the Deliveroo share price. The company isn’t making money, and it’s not likely to make money in the near term. That makes it very difficult to place a value on the shares.

Deliveroo share price opportunities

There’s no guarantee the company will be unprofitable forever. If a competitor like Uber Eats decides to exit the UK, that will leave a massive gap in the market for the corporation to take. This could help Deliveroo turn a profit. 

What’s more, if the whole industry decides to stop concentrating on growth at all costs, they may be able to increase prices. This would benefit every company, including Deliveroo.

But until there’s some stability in the market, I’m going to avoid the Deliveroo share price. The company could continue to lose money for years and, sooner or later, it may have to ask shareholders for more money.

This is just my opinion, and the business hasn’t said it will need to raise any more funds.

Still, that doesn’t mean Deliveroo isn’t facing an uncertain future. It’s challenging for me to tell what the business and the delivery industry will look like five years from now. That’s the overriding reason why I’m avoiding the enterprise. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Just Eat Takeaway.com N.V. and Uber Technologies. 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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