After a period of underperformance following the company’s March Initial Public Offering (IPO), Deliveroo (LSE: ROO) shares appear to be on the up. Yesterday, its share price jumped 9.3%. Since mid-May, it’s risen nearly 20%.
Here, I’m going to look at why Deliveroo’s share price is rising right now. I’ll also discuss whether I’d buy the stock for my portfolio.
Why Deliveroo’s share price is rising
The reason Deliveroo’s share price jumped 9% yesterday is that a UK court ruled the food delivery company’s couriers are self-employed. This is a big win for Deliveroo. If the court had ruled its couriers are employees (as a court did with Uber recently), the company could have been looking at significantly higher costs (sick pay, holiday pay, hourly rates, etc).
The uncertainty surrounding this issue was potentially holding the share price back. Now that the court has backed Deliveroo, we are seeing sentiment towards the stock improve.
As for the strength in the share price since mid-May, I think this is mainly due to an improvement in sentiment towards high-growth stocks. In the first half of 2021’s second quarter, high-growth shares were very much out of favour. With bond yields rising on the back of inflation concerns, investors were focused on value stocks. However, since mid-May, bond yields have fallen and growth has made a big comeback. This is illustrated by the performance of Cathie Woods’ ARK Innovation ETF, which is up nearly 25% since mid-May.
Should I buy ROO shares for my portfolio?
While the court decision this week has eliminated a key risk in relation to Deliveroo shares, the stock still isn’t a ‘buy’ for me.
There are certainly things to like about the company. Its growth, for example, is very impressive. For the first quarter of 2021, Deliveroo posted 130% growth in gross transaction value (GTV). I also like the fact the company is founder-led.
However, there are three issues that concern me in relation to Deliveroo shares. One is that the company is still generating big losses. Last year, it made a loss of £221m. This adds risk to the investment case. The share prices of unprofitable companies can be hit hard in a market sell-off.
Another issue is that the company faces competition from some powerful rivals. Not only does it face competition from Uber, it also faces competition from Just Eat Takeaway.com, which recently acquired Grubhub and became a very powerful force in the food delivery world.
Finally, there’s the IPO lockup expiry. In September, insiders at Deliveroo will be free to sell their shares and pocket their profits from the IPO. This could put downward pressure on the share price.
Given the risks, I’m going to keep Deliveroo shares on my watchlist, for now. I think there are better growth stocks I could buy for my portfolio today.
