The Deliveroo (LSE: ROO) share price endured a baptism of fire following its IPO in March. Fears over its valuation, allied with an intense legal battle against its delivery riders, forced the sector giant to slump from its £3.90 per share launch price.
However, some encouraging news flow has helped Deliveroo’s share price rise sharply over the past fortnight. And at £3.18 per share, it’s no longer a million miles away from its IPO price.
Is now the time to buy Deliveroo, then?
Why Deliveroo’s share price could soar
There’s are several reasons why Deliveroo could prove a top stock to buy today:
#1: First-round winner in the labour war. Deliveroo’s share price has soared after the Court of Appeal ruled in June that its drivers are self-employed rather than employees. It’s the fourth time its riders have had their claims to be considered Deliveroo workers thrown out. An adverse decision would have forced the IT services company to pay the minimum wage, as well as offer a range of other benefits and rights.
#2: The market is predicted to grow strongly. It’s true that Covid-19 lockdowns have seriously bolstered Deliveroo’s profits. But it would be a mistake to think the food delivery arena has peaked. The Business Research Company thinks this online market will be worth $192.2bn by 2025. That compares to $126.9bn today.
#3: Investing heavily for growth. Deliveroo is spending vast amounts to make the most of this exploding industry too. Indeed, just yesterday, the UK share announced plans to hire 400 more tech workers to boost its services and improve its app.
Should I buy this UK share?
There’s clearly reasons to be hopeful for the Deliveroo share price, then. But I can’t help but keep worrying about long-term profits as uncertainty over its business model will likely persist.
Okay, the company won in the Court of Appeal last month. But, as Hargreaves Lansdown says, “the battle for improved working rights being fought by contractors is far from over with a European Commission review of how the gig economy operates still underway.”
Deliveroo might also find that UK legislators take action to strike down its working model later down the line. The Labour Party has demanded that the government outlaw what it describes as the company’s “exploitative employment practices” in what could prove to be an increasingly political issue. Industry rival Just Eat has put thousands of its riders on employee contracts as the backlash against the gig economy has intensified.
Deliveroo also faces a host of competitors that could dent its path to profitability. As well as heavyweights Just Eat and Uber, new entrants in the sector are springing up left, right and centre.
The market might be growing at a tremendous rate, but Deliveroo might have to peddle mighty hard to deliver decent shareholder returns in this environment. All things considered, I’d rather buy other stocks for my portfolio instead.
