All the hallmarks of a thriving business are present, and yet I won’t touch the shares with a fairly lengthy bargepole. Here’s why. 

Growth needed

To start with, billions in revenue doesn’t mean you actually make any money. And a lack of earnings has been something of a theme of Deliveroo’s operations so far. Granted, it turned a profit last year for the first time and dividends are already being mentioned. But the firm is trading at 45 times forward earnings. That’s not a good buy for me without a hefty chunk of earnings growth. 

Now, you might say, many unprofitable companies go on to be terrific buys. This is indeed true. I remember seeing Reddit IPO last year having not made a cent since 2008. But it turned a profit a couple of quarters later and the shares are up about four times in value since then. That’s often the story with these fledgling, jam tomorrow-type stocks. I accept it could be the case with Deliveroo. 

Where things start to fall down for me is the business model. Deliveroo’s pricing is around £3 per order. That’s an acceptable amount to get food delivered, but is there room for increases in order to grow earnings? I think that while a rise in the fee could help boost profits, there’s also a risk it could deter some customers and the company has made no suggestion that it’s even considering such an increase. That’s understandable, as surely folks wouldn’t want to pay much more to get sent a couple of Hawaiian poke bowls (the firm’s most popular order, by the way).”

Regulatory issues

On the other side of things, I don’t think there’s much fat to trim from operations either. The firm relies on cheap labour in a sector with lots of competition. With other big delivery services competing for business, it’s hard to see much room for margin expansion here either.

There’s the question of regulation too to take into account which is always a threat in these nascent gig economy types operations.

All in all, there are a lot of questions here. Can Deliveroo deliver (ahem) on earnings growth or win market share against the competition? Can it avoid the regulatory hammer? Maybe management has all the answers, the stock flies up and I look back in 10 years with egg on my face. 

I wouldn’t be overly surprised. The firm’s rise so far has been exceptional. It has millions of regular customers and other investors are putting a heady valuation on the shares. In any case, it’s not a buy for me today.

The post Here’s 1 expanding FTSE 250 stock that I wouldn’t touch with a 10-foot bargepole appeared first on The Motley Fool UK.

With a strong international expansion plan underway and clever operational strategies, Deliveroo is arguably a top investment for me to consider owning.

Lots of future growth potential

The company operates in 12 countries currently, and I’m impressed by its agile international strategy. It’s entered and exited various markets to optimise results. For example, it exited Germany, Taiwan, Spain, Australia, and the Netherlands, while launching in new markets like Kuwait and Qatar.

Furthermore, to support its growth, Deliveroo is expanding its grocery delivery service. This has already shown strong performance in the UK and the United Arab Emirates.

It’s also expanding into non-food retail, like for toys and electronics. Furthermore, Deliveroo Hop, its rapid grocery delivery service with faster delivery times and a wider selection of grocery items, could attract more customers.

The shares aren’t cheap

While the company has a favourable international market position, the shares are definitely not cheap. With a price-to-sales (P/S) ratio of 1.21, which is much higher than the industry median of 0.64, this is certainly a risk.

However, the market has priced the investment richly for a reason. It has delivered very strong revenue growth over the past five years, of 34% on average.

In my opinion, the stock is not too expensive to invest in. However, I’m certainly not considering it for a big allocation in my portfolio, if I do invest because there is still a higher risk of volatility due to the P/S ratio.

Its margins could come under pressure

Deliveroo has major competitors, including Uber Eats and Just Eat, and has a reduction in market share from direct-to-consumer delivery, like Domino’s provides.

The food delivery industry also has low margins, driven by high labour and operational costs. Currently, the company has a net margin of just 2.6%. Therefore, it also has less free cash flow. This means it can develop less financial security than one may want from an investment.

Given the competition, it’s likely fair to assess that Deliveroo could face future pricing pressure. This is also very true during a time when automated delivery could become commonplace. If management fails to introduce the correct technology innovations, it could be undercut in price by other delivery providers that do so successfully.

However, this business is still in its early days, and I expect its net margin to expand. It only reported positive free cash flow and profit for the first time in 2024.

I’m waiting for a better valuation

Deliveroo is a service I use often, and it’s an investment that I believe has a lot of room to grow in value over the long term.

I’m definitely bullish on these shares. However, because the valuation is quite high, I’ve decided not to invest just yet. Instead, I’m going to see if it becomes cheaper at a later date; then, I’ll buy my stake.

The post Up 27% in a year! Is this FTSE 250 stock a golden opportunity? appeared first on The Motley Fool UK.

Now, this share price recovery could have further to go. However, I’d rather buy shares of a key competitor.

Still growing

Deliveroo’s recent Q3 trading update was solid, given the challenging consumer backdrop.

For the quarter, gross transaction value (GTV) was up 5% year on year while revenue was up 3% at constant currency.

The company noted that growth trends were underpinned by an expanded selection, targeted promotions, and service enhancements.

Looking ahead, management was confident about the future.

“My confidence in our ability to drive growth and deliver on our goals for profitability and sustainable cash flow generation has never been stronger,” said founder and CEO Will Shu.

So, the growth story here appears to be intact.

What turns me off Deliveroo shares, however, is the lack of real profits.

This year, Deliveroo is expected to generate negative earnings per share.Meanwhile, next year, the earnings forecast is only 0.081p.

That puts the forward-looking P/E ratio at about 1,720 right now.

Given the lack of profits and the sky-high valuation, I don’t see a lot of appeal in the stock at the moment.

A better stock?

One stock in this industry that does look appealing to me right now, however, is Uber Eats owner Uber (NYSE: UBER), which is listed in the US.

From an investment perspective, Uber strikes me as a more attractive proposition than Deliveroo.

For a start, it has a more diversified business model.

With Uber, I get exposure to rideshare (a key part of the travel industry), food delivery, freight/logistics, and digital advertising.

Second, it’s growing faster. Earlier this week, the company reported growth of 11% for Q3.

It’s also now profitable and generating a lot of cash. For Q3, the company posted net income of $221m and free cash flow of $905m.

As a result of this profitability, the company is set to join the S&P 500 index soon. This should increase interest in the shares as Uber will be classified as an Industrial stock and I think this will interest a lot of institutional investors.

As for the valuation, it’s a lot lower than Deliveroo’s. Looking at the earnings forecast for 2024, the forward-looking P/E ratio is 47.

Of course, this stock has its own risks.

This year, Uber shares have enjoyed a strong rise, almost doubling. After that kind of jump, there’s always the risk that some profit-taking will send the price lower.

But given that the company’s market cap is only around $100bn (quite small for a US tech firm), I’m optimistic that it can go higher in the medium to long term.

It’s worth noting that analysts at KeyBank just put a $60 price target on the stock. That’s about 20% above the current share price.

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But City analysts think positive earnings could arrive in 2024. And a return to 200p is not out of the question in the coming months and years.

The food delivery company arrived on the London Stock Exchange on 31 March that year with an initial public offering (IPO) price of 390p per share. But the stock crashed on the first day to about 290p. And after a bounce higher it collapsed even further to current levels.

It was one of the worst-performing IPOs ever! And right from the start, investors questioned the company’s profit predictions and forecasts.

Plagued by lack of earnings 

The big problem for the business is a lack of earnings. Although the IPO was in 2021, the business was established around 10 years ago. And revenue growth has been robust with strong advances from year to year as the business expanded internationally.

But profits are elusive. Even if the ink turns from red to black in the accounts, it seems almost certain this will prove to be a low-margin business. There’s only so much money that can be skimmed from your typical tikka masala without customers baulking at the excessive cost.

Deliveroo looks like a commodity-style business rather than a potential high-earning enterprise with a strong competitive advantage.

However, there’s no denying the large and growing culture for delivered groceries and takeaways. Ordering delivered food is a way of life for many people. And that trend looks set to continue and grow.

The company has been building its network of food suppliers and establishing trust and strong trading partnerships for around a decade. 

During that time, it’s been nipping and tucking operations to optimise efficiency. And it even rolled back from some territories and reined in its own expansion to focus on profitability.

A competitive space

But the food delivery space is crowded. And customers in many geographies can choose between several companies. Such competition is a recipe for modest profit margins ahead.

However, analysts predict positive normalised earnings of around 1.06p per share in 2024. And if earnings are about to turn positive, the company could build on the situation in the years ahead.

The share price has actually been creeping up in anticipation from a low point below 80p in the autumn of 2022.

There’s valuation risk here though. The forward-looking earnings multiple when set against earnings expectations is in three figures. There’s still a long way to go before Deliveroo can justify its valuation against earnings.

Speculation may drive the stock back to 200p. But there isn’t much to become excited about in the third-quarter trading update, released on 19 October. 

Mentions of earnings are absent from the report. Although the company expects the weaker measure of adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) to be in the range of £60m-£80m for the full trading year to 31 December.

For me, this is a business to watch for the time being. And I’d like to see established earnings before entertaining the stock for my portfolio.

The post Is the Deliveroo share price heading back up to 200p? appeared first on The Motley Fool UK.

Accelerated earnings

As a frequent Deliveroo user, it’s easy to attest that it remains popular despite consumers returning to restaurants post-lockdowns. The convenience of delivery keeps loyal customers hooked, and I feel its selection and reliability outpace competitors like Just Eat. Consequently, it’s no surprise to have seen the platform retain its users despite the current cost-of-living crisis.

Yet it should be noted that growth has been stagnant over the last couple of years in average monthly orders and monthly active customers. Unless this picks up, then this could represent a real risk to the shares’ future performance.

Additionally, the food delivery field is crowded with well-funded rivals, so profitability may be modest in the medium term.

However, if Deliveroo can continue to scale, I’m confident this should improve over time, especially if it ventures into the super app space like Grab. Developing a super app could unlock significant new verticals for the FTSE constituent. After all, Deliveroo is a household name in the UK, and that brand power holds plenty of value.

The company has been disciplined on the cost front. It’s been wisely exiting unprofitable areas to boost earnings in an attempt to turn a net profit — something no other food delivery company is yet to achieve.

As such, the board has upgraded its EBITDA guidance for the year significantly — from £20-£50m to £50-£60m. This is a rarity to see these days given the macroeconomic climate.

As mentioned, risks around growth and margins persist, of course. But with the stock so beaten down, I think most of this negativity is priced in already. Therefore, patient investors could be rewarded if the FTSE stalwart can sustain the upward momentum found this year.

Room for growth

As one of the early movers in food delivery, Deliveroo benefits from strong branding, consumer trust, and restaurant relationships built over the years. These competitive advantages can’t be easily replicated by newcomers.

Deliveroo’s delivery network also hums with hard-to-match efficiencies optimised over time. Management seems to be focused on balancing growth and profitability wisely. Investors may be happy to see the firm not chasing volume at all costs as it was before.

Although several analysts question whether increased competition spells doom for Deliveroo, there’s still room for optimism, I feel. As the saying goes, a rising tide should lift multiple boats. And with real wages now finally above inflation, a return to discretionary spending could bode well for the FTSE stock.

The food delivery market seems far from saturation as it still makes up less than 20% of UK restaurant spending, and is even smaller when it comes to groceries. So, as more customers try delivery and chains expand their partnerships, the entire sector could grow.

For contrarian investors, excessive pessimism often signals opportunity, and Deliveroo may be one opportunity. Nonetheless, until net profitability can be achieved, investors may not want to risk a sizeable chunk of their portfolios here. Even so, this growth stock may still be worth dipping a toe into.

The post Down 60%, are Deliveroo shares the FTSE’s biggest bargain? appeared first on The Motley Fool UK.

The first reason I’m looking at this stock is the cheaper price. Deliveroo shares closed on IPO in 2021 at 282p before growing to 390p during the pandemic. Now, the price is only 115p which means I could buy in for around a 70% discount from its all-time high. 

How cheap is that? Well, I can’t find a valuation based on earnings as the firm is still in its pre-profit stage. It’s currently valued at £1,999m which neatly matches its 2022 revenue of £1,974m. That makes a price-to-sales ratio of one, which I see as reasonable for a company the CEO Will Shu recently said is “early in the journey”. 

And the company has been growing significantly. Its business model of delivering from restaurants to customers using an app has been growing revenues at a five-year average of 30%. Last year, which saw the end of the pandemic and presumably fewer food delivery orders, the firm still posted a 7% increase. 

Deliveroo has good cash on hand too. With about a billion in net cash, I figure there’s another four years before any shares I buy would be at any risk of dilution.

Where are the profits?

Four years sounds like a decent amount of time, but it’s not helped by a challenging environment. Rising costs, inflation, and the cost-of-living crisis could all see margins squeezed in the coming years.

This is reflected in its latest update. For Q1, monthly active customers hit 7.1m, down from Q1 2022’s 7.6m and also Q4’s 7.4m. If this is a sign of things to come, I’m not sure I’d want to buy in here.

And if growth is slowing, when will the profits arrive? Deliveroo needs to make its margins positive somehow. Increasing fees is risky and could drive away customers. And I can’t see it freeing up funds from its payroll, as it has already made headlines for paying drivers below minimum wage. 

That last point leads me to the regulatory risk here. The company pulled out of Spain recently after the government gave more employment rights to ‘gig economy’ workers.  What if the UK, which makes up about 60% of users, followed suit? Would that be the end for any shares I buy?

Am I buying?

More generally, I’m not seeing a moat here. There are other food-to-go delivery services. Similarly, the firm has little in the way of assets. That was the big undoing of WeWork, which was once a market darling.

As much as I like finding growth-oriented UK shares, I think there’s too much risk here. And with the markets taking a hit recently, I think there are better value buys to be had.

The post Down 70%, are Deliveroo shares now a no-brainer buy near £1? appeared first on The Motley Fool UK.

The legendary investor Peter Lynch once said, “insiders might sell their shares for any number of reasons…”

For example, tax collectors could come knocking, a lender could unexpectedly call a loan, or a property they own could suddenly need repair costs.

“…But they buy them for only one: they think the price will rise”.

Order up, sell out

On 26 April, Deliveroo (LSE:ROO) CEO Will Shu sold 1,995,924 of company shares, worth £2.1m.

As Lynch pointed out, we don’t know what personal reasons may have led the CEO to make that call.

We do know, however, that the sell decision came amid job cuts, a fall in order numbers, and a decision that Deliveroo would exit an important market.

In February, Shu announced that 350 roles at the food-delivery company would be slashed, equal to around 9% of its headcount.

Across the group, orders fell in the final quarter of 2021/22.

To add insult to injury, last year the company had to shut up shop in Australia, the home of its marsupial mascot.

Still, Deliveroo reported a 14% increase in revenue in 2022 compared with 2021.

And unlike many beaten-down pandemic growth stocks, the company has no debt. In fact, its net cash balance is rather large at £1bn, or 50% of its market capitalisation.  

A bull’s resolve

There has been a stream of gloomy news for the London Stock Exchange Group (LSE:LSEG) this year.

Construction giant CRS said last month it would de-list from the LSE in favour of the New York Stock Exchange. After CRS, fellow construction company Kingspan said it too was jumping on the de-listing bandwagon.

According to the Financial Times, even top executives at Shell have been weighing up abandoning the LSE.

Still, that hasn’t stopped one insider at the capital markets infrastructure provider from upping his stake in the company.

Martin Brand, a non-executive director at the LSE, was busy buying (and selling) stock in the company last month.

Strangely, Brand reported eight transactions in LSE stock during April, buying five times and selling three times.

The net effect of Brand’s activity in April was to buy 28,910 shares with a net value of nearly £2.3m.

Brand could have been trading the shares based on news flow, or his activity could have been for personal reasons.

Still, he appears to be kicking off May with a bigger exposure to LSE than he had in April.

To buy or not to buy?

The Deliveroo CEO’s decision to divest over £2m of shares in the company is a red flag from my perspective.

As for LSE, although an insider upped his stake considerably, the activity reflects something closer to trading than investing, with eight transactions in one month.

I think I can find better opportunities for my portfolio, so I will be sitting on the sidelines for now.

The post 2 UK stocks with massive insider buying or selling! appeared first on The Motley Fool UK.

Starting with the problems

To begin with, I completely understand why the share price is down 63% over the past two years (and 14% over the past year). The business was able to take advantage during the pandemic, but as this eased off, customer demand fell.

Despite new initiatives, such as developing partnerships with the likes of Waitrose and Lloyd’s Pharmacy, investors continued to shy away from buying the stock.

Fundamentally, for each of the past three years, the business has lost over £200m in profit before tax. Regardless of what new marketing push or partnership has been announced, it hasn’t translated to the bottom line.

The path to profitability

The first reason why I feel Deliveroo shares could be back on the menu is a strategy shift. The annual report released earlier this year was entitled “The path to profitability”. The leadership team gets it, and understands that investors need to see a profitable company going forward.

Positive signs are already emerging. In H2 2022, the adjusted EBITDA margin (as a percentage of the average gross transaction value) was 0.2%. This might sound complicated, but it basically means that the company can be profitable going forward as the margin is above zero.

This might not sound like a big deal, but it is when I realise that this margin has been negative for Deliveroo for quite some time. It paves the way for the company to make a profit in the future.

Getting the basics right

Another key factor is that the business is already cutting costs. This included letting go of 350 employees (9% of the workforce) and other measures to reduce expenses.

Reducing costs is key to making a profit, but what about revenue? For 2022, revenue grew 14% year on year. So this is also moving in the right direction.

A similar jump in revenue this year, combined with lower costs might not be enough to flip it to a profit, but it certainly will narrow the loss from previous years. For investors, seeing signs of losses becoming smaller should be enough to spark interest in buying the stock again.

Time to wake up

Some investors might be sceptical about investing now based on the potential for Deliveroo to become profitable. Yet consider if later this summer, the company issues a strong trading update. In the autumn, it upgrades earning forecasts. By then, the share price will have likely already jumped considerably!

In order to reduce risk, an investor can use pound-cost-averaging. This involves buying the stock multiple times, such as every month. In this way, it gives a blended average price, instead of committing everything in one go. For Deliveroo shares, I think this is a smart idea.

The post This sleeping FTSE pandemic stock could be about to awaken! appeared first on The Motley Fool UK.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

Deliveroo

What it does: Deliveroo is one of the UK’s biggest food delivery services. It also has operations in across the world, such as Qatar, the UAE, and Hong Kong.

By John Choong. Having fallen off its highs of £3.86, Deliveroo (LSE:ROO) shares are now trading below £1. Nonetheless, a move back to the pound mark might not be too far away when considering its accelerated growth prospects and better decision-making from management.

Although pulling out of key growth regions such as Australia and the Netherlands didn’t seem like the right move for a growing company, this has allowed Deliveroo to achieve EBITDA profitability this year, much sooner than expected. This is good news for an investor like myself as I’d rather see profits than poor user acquisition.

Consequently, the unicorn company delivered excellent results in its latest trading update, with gross transaction value (GTV), total orders, and GTV per order improving despite gloomy forecasts from analysts who were predicting a blood bath as a result of high inflation impacting discretionary spending. Pair all of that with a strong balance sheet and reasonably cheap price-to-sales multiples, it’s easy to see why I started a position.

John Choong has positions in Deliveroo.

Diploma

What it does: Diploma is a conglomerate made up of businesses focused on specialised industrial distribution.

By Stephen Wright. Most obviously, when it comes to growth shares, I’m looking for something that’s growing and is going to keep doing so. That’s why my growth stock to buy in February is Diploma (LSE:DPLM).

The company released a trading report last month. To me, it seems to indicate continued strong performance. 

Over the last decade, the company has averaged 13% annual revenue growth. And according to its latest update, the top line is currently growing at 30% per year.

As a conglomerate, I’d expect a good amount of Diploma’s growth to come from acquisitions. But the amount of revenue growth from existing businesses was equal to the amount from acquisitions.

The company also also maintained strong operating margins. This indicates that its businesses are resilient even in a difficult macroeconomic environment.

Stephen Wright owns shares in Diploma.

Experian

What it does: Experian is a British technology company that specialises in consumer credit data.

By Edward Sheldon, CFA. Experian (LSE: EXPN) continues to generate solid growth. For the quarter ended 30 December 2022 (Q3 FY2023), the group generated total revenue growth of 7% at constant exchange rates. And looking ahead, it said that it expects to achieve total revenue growth of 8-10% at constant currency for the year ending 31 March 2023, along with “modest” margin accretion.

One reason I’m optimistic about Experian is that its data and analytics can help banks reduce loan losses. In its third-quarter results, the company noted that lender appetite for solutions that help understand loan affordability are increasing. Here in the UK, its ‘decisioning’ revenues were up 15% year on year in Q3.

Now, like a lot of growth shares, Experian has an above-average valuation. Currently, the forward-looking price-to-earnings (P/E) ratio is in the high 20s. I believe it warrants a premium valuation, however, as it’s a high-quality business with a strong economic moat.

Edward Sheldon owns shares in Experian.

Frontier Developments

What it does: Cambridge-based Frontier Developments develops and publishes video games for the interactive entertainment sector.

By Paul Summers. Buying when everyone else is selling can sometimes generate huge profits over the long term. This is why Frontier Developments (LSE: FDEV) is my pick of the growth shares for February.

Things are a bit bleak at Frontier. A profit warning arrived last month following disappointing sales over the Christmas period. Naturally, even the most dedicated gamers are tightening the purse strings at times like this. 

This sticky patch might continue. However, the positives arguably outweigh the negatives. 

Management has set a minimum expectation of revenue coming at “not less than £100m in FY23”. That’s lower than the previous year’s record of £114m but hardly a disaster. Frontier also looks financially solid. 

Having tumbled over 60% in value in the last 12 months, the stock now trades at less than 10 times earnings. That could prove a bargain in time.

Paul Summers has no position in Frontier Developments.

IP Group

What it does: IP Group develops intellectual property-based companies via long-term partnerships with research universities.

By Charlie Carman. IP Group (LSE:IPO) focuses on two sectors. Its life sciences investments total £704.4m and account for 62% of the portfolio. Technology investments make up the remaining 38% at £334m.

Gene sequencing firm Oxford Nanopore Technologies is the company’s largest single position. Admittedly, a substantial haircut in Oxford Nanopore’s valuation since its 2021 flotation has weighed on the IP Group share price.

However, Oxford Nanopore’s recent trading update showed welcome signs of improvement. Full-year 2022 revenues grew across all customer groups.

In addition, IP Group’s cleantech investments look promising. The group owns a 27.5% stake in First Light Fusion, which is developing a new approach to inertial fusion. IP Group estimates the business could double in value to over $1bn by 2025.

Down 35% over 12 months, IP Group shares seem oversold to me. This disruptive company offers shareholders the possibility to benefit from breakthrough technologies with big potential. I’d buy these growth shares.

Charlie Carman does not own shares in IP Group. 

Keywords Studios

What it does: Keywords Studios is the leading technical and creative talent provider to the largest video game studios worldwide.

By Zaven Boyrazian. Investing in the video games industry can be risky. After all, making a game requires a lot of financial resources — and for many studios, a flop can be disastrous.

That’s why Keywords Studios (LSE:KWS) is a far more interesting way to play this space. The company provides technical and creative services to the largest development houses in the world.

Whenever working on a new project, studios often rely on Keywords to supply the crucial talent needed. With a reputation for quality, the demand for Keywords’ services has steadily risen over the years. And the best part is, even if a finished game fails to meet sales expectations, Keywords still get paid.

As per the latest trading update, full-year revenue for 2022 is expected to be 32% higher than a year ago, with pre-tax profits increasing by 28%, well ahead of analyst expectations. While a slowdown in consumer spending might create some indirect short-term headwinds, the long-term potential continues to excite me.

Zaven Boyrazian owns shares in Keywords Studios.

Watches of Switzerland Group 

What it does: Watches of Switzerland is an international retailer of the most prestigious and recognised luxury watch and jewellery brands. 

By G A Chester. The mid-cap FTSE 250 index underperformed the blue-chip FTSE 100 by a wide margin last year. Yet many mid-caps have higher growth potential than the Footsie’s elephants. 

One stock I’m particularly keen on right now is Watches of Switzerland Group (LSE: WOSG). Despite a continuing strong business performance through 2022, its shares fell more than 40% over the year. 

I like the company’s longstanding, collaborative partnerships with top-tier luxury brand owners. These partnerships represent a barrier to new entrants to the market. And I like its growth prospects. It has a leading position in the UK, a growing presence in the US (it’s aiming to be the clear market leader there, too) and opportunities in Europe.  

There’s a risk it may encounter setbacks in its expansion, but I’m encouraged by the continuing good execution of its growth strategy. I’m expecting it to report further progress in a trading update on 9 February. 

G A Chester does not own shares in Watches of Switzerland.

The post Best British growth shares to buy for February appeared first on The Motley Fool UK.

Delivering value despite tough times

With food inflation at 18%, many investors were expecting Deliveroo to post a poor set of numbers for 2022, but the opposite happened. Inflation benefited the food delivery company instead, with both its Q4 and full-year figures beating analysts’ estimates.

Despite total orders and monthly active customers seeing declines, this was offset by the impact of higher prices of items, as Deliveroo’s more affluent customers showed their willingness to spend. This pushed its more important metrics (GTV and GTV per order) up.

Consequently, the FTSE stalwart surpassed its original outlook, ending the year with a -1% margin on an EBITDA basis. This was thanks to a strong H2 performance that saw the firm hit EBITDA breakeven. As a result, management is forecasting to become EBITDA profitable in 2023.

Taking the right routes

How’s that going to happen? Well, Deliveroo has been taking all the right steps to improve its bottom line. The first came with its exits from Australia and the Netherlands. While that initially soured investor sentiment, it proved to be the right call given the poor market share and operating landscape in those regions. In fact, the exit will now provide at least a £20m tailwind to the group’s profits.

Deliveroo has instead decided to plough its resources into entering and maturing its base in more affluent markets such as Qatar, Hong Kong, and the UAE, where it’s seen more success. Pair this with an increase in restaurants (+8k), grocery stores (+2k), and rider satisfaction (+3%) over the past quarter, and I can see a promising investment case forming.

Additionally, the board will continue optimising its growth avenues in advertising while improving their cost structure this year. And as mentioned, CFO David Hancock even said on the earnings call that Deliveroo could hit EBITDA profitability with flat GTV growth this year.

Riding upwards

Nonetheless, that doesn’t remove the significant short-term headwinds of rampant inflation and the cost-of-living crisis. But it shouldn’t detract away from the unicorn’s long-term potential either. The food delivery industry is still young as penetration remains low with a large total addressable market across many countries. This is especially the case in an increasingly digitalised society.

And although the likes of Barclays and JP Morgan rate Deliveroo shares a ‘hold’ with an average price target of £0.96, I’m more inclined to side with Jefferies and Berenberg that have ‘buy’ ratings on the stock with an average price target of £1.45.

Considering Deliveroo’s strong balance sheet, declining cash burn, and profitability approaching, I feel confident in CEO Will Shu’s ability to navigate his service into generating positive free cash flow soon.

Moreover, having seen its valuation multiples, I think its current share price is reasonable. I believe sufficient downside risks have been priced in with a lack of long-term upside potential being accounted for. Therefore, I’ll be starting a small position in Deliveroo shares very soon.

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