I was averse to buying Deliveroo (LSE: ROO) shares even before the company staggered onto the London market in March. Now that the price has started rebounding from its initial tumble however, was I wrong to dismiss the delivery firm so vehemently?
Deliveroo shares: now delivering
Last month’s upgrade to growth forecasts certainly took me by surprise. With quarterly food orders having rocketed 88%, Deliveroo said its gross transaction value would increase by somewhere between 50% and 60% in 2021. That’s a stonking improvement on previous expectations of between 30% and 40%.
Elsewhere, the company’s potential withdrawal from Spain makes sense, considering it only generates 2% of its gross sales here and significant investment would be required to improve this. In a highly competitive environment, Deliveroo needs to pick its battles. Based on these developments, the recovery feels justified.
Then again, many of my original concerns haven’t changed. The company doesn’t make a profit and won’t for some time, due to ongoing investment. The share ownership model is still questionable and the debate over the rights of gig workers won’t cease anytime soon.
Whether the above is sufficient to stop the recovery in Deliveroo shares is another thing, of course. A few firms have struggled following their IPO only to go on to deliver stunning gains, despite ongoing concerns (step forward Facebook).
If I were to buy a tech-related stock right now however, it wouldn’t be this one. I think there’s a better option hiding in plain sight in the FTSE 250.
Better tech buy
I doubt Bytes Technology (LSE: BYIT) will be on the lips of many private investors. The UK-based company has only been listed since December 2020, following a demerger from South Africa-based Altron Group. However, this may be set to change.
BYIT is a specialist in providing software, security and cloud services. Given that cybersecurity is and will remain hugely important going forward, I think the company could find itself in a sweet spot.
Business is already good. Back in May, the company announced that revenue had grown by 5% to £393.6m in the year to the end of February. Robust spending by customers over the pandemic also allowed BYIT to log record adjusted operating profit of £37.5m. More recently, the business reported strong demand from clients in the public sector.
What’s not to like?
One drawback is the valuation. At almost 36 times forecast earnings, shares are undeniably pricey to acquire. This arguably makes them more susceptible to a big fall if we get some less-than-encouraging news on, say, the global economic recovery (although there’s potential for Deliveroo shares to fall harder, given the aforementioned lack of profitability). Margins in this line of work are also pretty thin and rising costs should be expected following the lifting of restrictions.
Notwithstanding this, the company has net cash on its balance sheet. Returns on capital are also seriously good. BYIT also benefits from a huge amount of customer loyalty, which may give it the edge over peers.
One to watch
Recent news makes me think I may have been too dismissive of Deliveroo shares. Nevertheless, I’d still be far more comfortable buying stock in a company already making decent profits.
I wouldn’t go ‘all-in’ on BYIT today. However, a small starter position might be in order.
