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Here’s why the Deliveroo share price momentum could reverse

A Deliveroo rider cycles in London
Image: Deliveroo

The Deliveroo (LSE: ROO) share price has done well over recent months. A particular boost came from Delivery Hero taking a 5.1% stake in the takeaway delivery company. The question now, as that momentum has stalled is: will the shares move on again or are they set to fall? And looking longer-term what could be in store for the firm?

Up or down?

It’s hard to know what will happen to a share price in the short term. As Warren Buffett and Benjamin Graham, his mentor, have said: “In the short run, the stock market is a voting machine. Yet, in the long run, it is a weighing machine.

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But I’m going to make a prediction that the Deliveroo share price momentum of recent months may be about to reverse. One reason is the bigger picture. That is that loss-making companies like Deliveroo could be hit hard if inflation persists because it puts upwards pressure on interest rates.

Looking more specifically at Deliveroo’s market, there are also a number of red flags for me. One is well known: a high growth market attracts competition and that’s definitely the case with food delivery. Deliveroo is a relative minnow, even after listing on the London Stock Exchange. It seems like this is why it is pulling out of Spain, made worse by a ruling from Spanish courts that riders are employees, rather than self-employed.

There has also been the introduction of price caps in New York. If that can happen in the US, even if just in one city – for now – then it can easily happen elsewhere. It begs the question of just what kind of a USP does Deliveroo really have? What can’t be replicated by others? I see very little to suggest it’s unique or adds anything that other companies can’t. It therefore has little moat and low barriers to entry.   

What to expect from the Deliveroo share price longer term

Of course, there are some positives. Deliveroo is expanding its partnerships and product range, for example through a deal with Boots. In the UK and internationally, it’s also moving into grocery delivery. This indicates it’s an evolving business, open to new opportunities and diving into complementary markets. As mentioned before, Delivery Hero has taken a stake, which might even one day mean a takeover approach. That could be rewarding for shareholders. 

Yet for all this, there’s a niggling doubt about what makes Deliveroo different. Why should its shares be rising when demand for takeaways is likely to subside as we’re no longer locked down? In its current state, I think Deliveroo won’t make for a profitable long-term investment and I won’t be adding it to my portfolio.

The only way I see it being a great success is if it becomes a true tech business, offering a platform for many consumer goods, delivered quickly. That requires a lot of investment, expertise and will take time. As the group is today — a takeaway and grocery delivery business — it’s not for me, either in the short or the long term. I think there are much better growth shares listed on the UK stock market. 

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Andy Ross owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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