When Deliveroo (LSE: ROO) listed at the end of March, it bombed. The initial public offering was termed “the worst IPO in London’s history” by some commentators. But in recent weeks, the Deliveroo share price has been moving up.
Here I consider why the share price has been moving up – and whether that can continue in July.
Market sentiment
Deliveroo didn’t get off to a good start in its relationship with City investors. From not identifying anchor investors to having more than one class of share, the company and its advisers struggled to satisfy potential shareholders. That led to dampened enthusiasm, which triggered the share price decline after it listed.
Negative sentiment is never good for a listed company, in my view. But I think its impact changes over time. The dust has now settled on the botched listing. Investors are thinking more closely about the details of the company’s business performance, I reckon. That helps to explain why the shares have moved upwards lately.
Bull factors for the Deliveroo share price
A host of elements that made Deliveroo attractive to at least some investors remain relevant. It has a strong brand and established market position. The demand for takeaway food has risen markedly during the pandemic and that shift is likely to continue.
In the first quarter, the company continued to experience accelerating growth. Orders grew 114% to 71m. In the UK and Ireland, performance was even stronger, with orders growing 121% to 34m. But the company’s expanding international operations also recorded blistering growth rates. Orders there grew 108% to 37m.
There are additional levers for growth beyond the core business. For example, Deliveroo provides a technology platform that effectively enables restaurant chains to outsource their delivery offering, from front-end digital presence to payments and logistics. Not only could that grow revenue, it may also increase Deliveroo’s overall market understanding. That could help its own branded business.
The Deliveroo share price: bear factors
But the dizzying growth in orders doesn’t necessarily mean there will be a strong financial performance from the company any time soon.
The costs of setting up and running a network like Deliveroo’s are extensive. But the barriers to entry for individual restaurants to compete in their own area are fairly low. Meanwhile, deep-pocketed competitors such as Just Eat could mean profit margin compression is a risk in multiple markets for years to come.
Due to its newness as a listed company, available financial information about Deliveroo is limited. It forecasts gross profit margins of 7.5%-8.0% for this year. But gross profit margins aren’t always closely correlated to earnings. The company’s strong growth in orders likely adds substantial costs, from recruitment to setting up robust systems needed to support higher business levels.
My next move on the Deliveroo share price
While I think the Deliveroo order growth is impressive, I don’t think there is currently enough financial performance information to form a clear view of the company’s long-term value.
The Deliveroo share price could keep moving up in July, in anticipation of sustained growth. But I think a key moment will be when it releases detailed first-half financial results later this summer. That will be one delivery from Deliveroo that is definitely worth chewing over. Until then, I am staying out of the shares.
