This is a good day for the food delivery stock Deliveroo (LSE:ROO). It is up 4% in early trading today following a strong update. The Deliveroo share price is now 331p, the highest levels seen since its underwhelming debut at the London Stock Exchange a few months ago.
Three positives from Deliveroo’s update
There are at least three positives I see in its latest update:
#1. GTV increases: One of Deliveroo’s preferred performance measures is the gross transaction value or GTV in short. This is the total value paid by customers. This number has shown a huge 76% increase in the April-June quarter compared to the same time last year.
In the UK and Ireland, the number has risen even faster, by 87%. I think this is impressive because last year at this time, we were in lockdown and demand for food delivery was on the rise.
#2. Orders grow: It is not just the value paid that has risen, the number of orders has seen a sharp increase of 88% as well. Here too, growth in the UK and Ireland has been particularly high at 94%.
#3. Improved guidance: Based on its performance so far and the increased expectations for the rest of the year, it now expects GTV to increase between 50% and 60% for the full year. It had earlier expected growth to be between 30% and 40%.
Long-term story looks good
So would I buy Deliveroo shares now?
I would. In fact, I already did, for five reasons that I wrote about a couple of months ago. Nothing has changed. In fact, it has only become clearer that companies that rely on digital sales are genuinely booming, and it was not just a one-off pandemic-related occurrence.
Earlier this week, e-grocer Ocado also released a robust update, with an over 20% revenue increase even as the pandemic eases. To me, this suggests that the pandemic has accelerated the conversion of customers to online shopping. And this includes both grocery shopping and the use of food delivery apps.
Competition delays profits
It will take a while for Deliveroo to turn profitable, though. In its update it has mentioned investments in growth opportunities could dent its profit margins. This is typical of fast growing companies in high-potential markets. And for that reason, I do not expect this aspect of its financials to drive its share price in the foreseeable future.
I would, however, like to see it expanding over time. It is in a competitive market, with heavyweight peers like Just Eat Takeaway and Uber Eats, so keeping momentum may not be as easy as it appears from the latest numbers. Besides this, the full effect of lockdown easing will be felt only in the next two quarters, so I will look out for those numbers.
Would I buy Deliveroo shares?
Going by its strong performance though, I am optimistic about Deliveroo shares. Not only have I bought the stock, I am its satisfied regular customer too. It stays a buy for me.
