The Deliveroo (LSE:ROO) share price has been somewhat volatile since its IPO in March. To date, the stock is down around 40% from its issue price of 390p. But towards the end of last month, it started to climb, only to fall once more. What’s causing this volatility? And is this a company I should be adding to my portfolio as a long-term investment?
The risks surrounding the Deliveroo share price
The initial decline in the Deliveroo share price appears to stem from the uncertainty surrounding some of the risks the company is currently facing. For starters, it is unprofitable and not by a small margin. In 2020 it reported a loss of £226m. And while it does have around £380m of cash on the balance sheet, it’s pretty likely the firm will need to raise additional capital in the future either via debt (which increases leverage) or through equity issues (which cause dilution). At least, that’s what I think.
Beyond the financial statements, there are also growing concerns regarding the employment classification of its riders. The Supreme Court recently decreed that Uber drivers are not self-employed freelancers but are employees. As such, the company’s path to profitability could be a longer one than hoped. Given that Deliveroo’s business model operates similarly, there’s a risk of the same court ruling being issued in the future. This would undoubtedly increase operating costs. And needless to say, it could push Deliveroo profit’s and its share price further into the red.
However, beyond these risks, the business itself does appear to be progressing relatively well.
Looking at its latest trading update, the company achieved accelerated growth for the fourth consecutive quarter. Total orders increased by 114% year-on-year to 71m. And its gross transaction value more than doubled from £715m in Q1 2020 to £1.65bn.
More recently, the company announced a new two-year partnership with Waitrose. Under the agreement, riders can now deliver groceries to people’s doorsteps within as little as 20 minutes. This new relationship had been in a trial phase since September 2020, starting with five stores. The programme proved to be immensely popular with customers, so it was extended to 40 shops. And now that the trial is complete, Deliveroo will be offering delivery services to 150 Waitrose supermarkets by the end of this summer.
Combined, these latest developments helped temporarily boost the Deliveroo share price, pushing it from 228p to as high as 270p within a week or so. But since then, it has once again come back down. Despite the progress being made and impressive growth, investors are still concerned about how the business will perform now that lockdown restrictions across the UK have begun to ease, and the ability to dine in restaurants has returned.
The bottom line
All things considered, I’ll be keeping Deliveroo on my watch list for now, even at its current share price. I do believe it has a path to profitability. But at the moment, there seem to be a lot of unknowns and risks surrounding its business model in a post-pandemic world.
Zaven Boyrazian does not own shares in Deliveroo. The Motley Fool UK has no position in any of the shares mentioned. 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.