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Should I buy Deliveroo shares after its trading update?

Image: Deliveroo

I’ve been watching Deliveroo (LSE: ROO) shares very closely since the company’s initial public offering (IPO). In fact, I commented on the stock shortly after it made its London debut. I said I’d monitor the shares then, and I was right to do so. The price has fallen since the IPO.

But now the company has released its first trading statement as a public entity. I still would not buy Deliveroo shares. Here I dissect the key takeaways from its latest announcement.

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Trading statement

Let me start with the positives. In general, Deliveroo’s results for the first quarter of 2021 were strong. The total number of orders were up 114% year-on-year to 71m over the period. Similarly, Gross transaction value, or GTV, increased by 130% year-on-year to £1.65bn.

The company also saw its monthly active consumer base grow by 91% year-on-year to 7.1m on average in the first quarter of the year. Even international growth during the period has been strong.

I’m impressed by these numbers. But the question I ask myself is why are Deliveroo shares still falling? I think it’s widely known that the IPO was overvalued, but surely these results should boost the price?

The key takeaway

I think the key thing investors have taken from Deliveroo’s trading update is the uncertainty over its outlook. The lockdown restrictions have acted as a catalyst and hence the stellar performance. But how long is this going to continue? Even Deliveroo is uncertain about this.

The company states that it “continues to operate in an uncertain environment given that the timing and impact of these restrictions being lifted in the coming weeks and months remain unknown. Deliveroo expects the rate of growth to decelerate as lockdowns ease, but the extent of the deceleration remains uncertain.”

So with an overpriced IPO and uncertainty about the future growth, it’s no wonder the stock has been falling.

Other concerns

I mentioned that I was concerned about Deliveroo’s shareholder structure when I first covered the company. It still makes me uncomfortable that Will Shu, the current CEO and founder of the company, has a large proportion of the voting rights. This means that small shareholders will not have their voices heard. Shu can simply overrule the majority.

In addition, the negative news surrounding Deliveroo’s treatment of its riders has not gone away. It has even put off some large institutional investors.

I’m also worried about the increasing level of competition in the on-demand food delivery space. Competitors such as Just Eat and Uber Eats dominate the market. I’m not sure how Deliveroo is going to differentiate itself.

I guess it could compete on delivering better customer service and offering food from exclusive restaurants. But if Deliveroo is going to compete on price then its profitability is likely to take a hit. I think it’s worth noting that the company is already loss-making. And this could impact its road to profitability.

My view

For now, I erring on the side of caution and staying clear of Deliveroo shares. If the lockdowns continue to ease, then consumers are likely to socialise and eat out more. This is likely to impact demand and thereby the stock. I’ll wait for more clarity from the company before I buy.

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Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK has recommended Just Eat 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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