Deliveroo (LSE:ROO) shares are up an impressive 56% over the past three months. After a dismal first week of trading post-IPO, the share price fell significantly from the issue price of 390p. Yet the remarkable turnaround now means that shares are trading at 383p, and touched 395p earlier this week. With 400p beckoning, how high could shares go this year?
An initial drop
One of the reasons for the sharp fall below the IPO price in the first place was due to large investors not participating at the beginning. These include the likes of Aberdeen and Aviva. The lack of desire from these large players to buy bulk holdings scared other investors, who worried the institutional investors knew something the rest of the market didn’t.
Another reason was the issue of gig economy workers. Uber was getting caught up in a legal case at the time regarding classifying its drivers as employees. Given the status of Deliveroo riders, that case had potentially expensive ramifications.
Both of these points have been dealt with, and the market has moved on. They don’t fundamentally change the business model in the long term, which is what Deliveroo shares should be priced on.
A strong recovery in Deliveroo shares
After the dust had settled, the strong performance in recent months has been thanks to positive results. Now that the company is public, greater transparency is given with regards to trading updates and financial results. This helps me to more accurately try and price where shares should be trading at.
For example, earlier in August the H1 results came out. Orders came in at 149m, up 100% year-on-year. Triple-digit growth was also seen in the gross transaction value (GTV) of orders. This shows me that demand is growing and that the value of the orders is also keeping up.
I think the marketing strategy of getting sponsorship for Euro 2020 football was also a great success. I’d imagine this should provide a boost to revenue in Q3 results.
One risk I note is that even with such strong growth, adjusted earnings is still negative. So clearly there is still a lot more work to be done in order for the company to register a positive bottom line figure.
Where to go from here?
It’s hard for me to accurately put a fair price on Deliveroo shares. As earnings are negative, the price-to-earnings ratio doesn’t offer me any value. It also isn’t paying out a dividend, so the yield here is 0%.
Given that analysts put the IPO level at 390p only a few months back, this is a good level to at least get back to. From there I think the size of any move higher will be dependent on how positive investors think the outlook is. In H1 results, the GTV growth percentage was raised. So this is a good start.
If Q3 results show further upside, then I don’t think it’s unreasonable to see double-digit percentage gains by the end of the year for Deliveroo shares. However, given the 56% move in three months, I struggle to see another 50%+ gain by the end of the year.
Overall, if I wasn’t already invested, I’d consider buying in at current levels.
