Deliveroo (LSE: ROO) has come a long way. The food delivery app had a disappointing debut at the London Stock Exchange in March this year. By the end of April, the Deliveroo share price had dropped to its lowest levels so far. Now it is up 50% from those lows as I write!
Delivery Hero acquires stake
But I think the best is yet to come for Deliveroo. Its shares are up some 5% in today’s trading on the news that the German delivery giant Delivery Hero has acquired a 5% stake in the company. Its CEO, Niklas Östberg, has said that the stock looks undervalued to them as per a Financial Times report.
If this were coming from anyone else, I may have taken the remark with a pinch of salt. However, Delivery Hero is a big company in the segment, with a market capitalisation more than 4.5 times that of Deliveroo’s, that clearly knows the business well. Also, interestingly, it also owns a small stake in Just Eat Takeaway, which is Deliveroo’s competitor in the UK market.
The good and the bad in the trading update
I am also encouraged by the company’s recent trading update. Its gross translation value, which is the total value paid by customers, grew by 76% in the second quarter of the year. The number is even stronger at 99% for the first half (H1) of the year. Based on these strong numbers, it now expects higher growth for the full year than earlier.
However, there is something less positive in the numbers that caught my eye as well. Growth in the second half (H2) of 2021 is expected to slow down significantly. At best, it is expected to grow by 32% and at worst by 15%. This is a far cry from the increase in H1.
Also, even compared to 2019, there is a softening in growth rates. From 186% in H1, it is now expected to slow down to 110%-142%. There are two clear reasons for this. The first is that H1 numbers look particularly strong, I reckon because we were still in lockdown. And second, H2 numbers show a come-off because we are less likely to order in now, as restaurants have reopened. So even though the numbers do show a decline in growth, I am not terribly concerned. Also, compared to 2019, it is still substantial growth.
What’s next for the Deliveroo share price?
We will get more insight into Deliveroo’s performance when it releases its half-year results later in the week. But from the looks of it, I think there should be strong revenue growth. It will remain loss-making in all likelihood though, as it ploughs the money made back into its business.
All in all, I like the stock. I have already bought it, for exactly the reasons that Delivery Hero states. It looks undervalued to me. And going by its rising share price, I imagine other investors believe that as well. I expect that it can rise more over time. It continues to stay a buy for me.
