Is the Deliveroo share price dip a buying opportunity?

Since its IPO, the Deliveroo share price has been falling. But, after recent declines, this Fool believes the stock is starting to look cheap.

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The Deliveroo (LSE: ROO) share price has been a consistent underperformer since the company’s IPO at the end of March. Indeed, the company has the unfortunate label of being one of the most unsuccessful tech IPOs in recent memory. It’s even been referred to as the “worst IPO in London’s history“. 

The company was launched with a market capitalisation of £7.6bn. But it’s worth just £4.7bn today. I think these figures say a lot about what the market thinks of the Deliveroo share price.

But is this an opportunity? If the company continues to grow, as it has done over the past five years, I think it could be. 

Growth potential

There’s no denying Deliveroo is a growth champion. Over the past five years, the company has grown from almost nothing into a multi-billion-pound business. Sales have surged over the past few years, thanks to an influx of new customers. The trend only accelerated last year. 

According to the company’s first-quarter trading update, the number of orders placed on its platform in the three months to the end of March increased 114% year-on-year. In addition, the monthly active user base on the platform increased 91% year-on-year to 7.1m users

The problem is, the company has struggled to turn this growth into cold, hard cash. The group is unprofitable and is relying on its cash reserves to fund losses. At the end of the first quarter, the Deliveroo had £1.5bn in cash, and cash equivalents, as well as access to a £150m revolving credit facility.

It’s difficult to say how long this cash balance will last. In 2020, a record year for the group in terms of order value, it lost £226m. Based on that level of losses, the company has enough funding for at least five years, possibly longer. 

Deliveroo share price risks 

I think Deliveroo’s growing losses have spooked investors into selling their shares in the company.

Unfortunately, the firm may continue to haemorrhage cash. The food delivery sector is incredibly competitive, and Deliveroo has to fight off better-funded competitors such as Just Eat and Uber. The longer it takes for the company to reduce its losses, the higher the chances are it will run out of cash. 

With that being the case, I plan to avoid the Deliveroo share price for the time being. However, I’m going to be keeping an eye on the enterprise over the next few months.

As the UK moves on from the coronavirus pandemic, I think it’ll be interesting to see if the company keeps its new customers. If it does, it may be a sign these customers are here to stay. That would give management more flexibility to increase prices and reduce marketing spend, which would help margins and profitability. 

Therefore, while I’m not a buyer of the stock today, I could be in the future if the firm’s figures improve. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any of the shares 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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