After its IPO, the Deliveroo (LSE: ROO) share price quickly gained the unenviable label of being one of the worst-performing initial public offerings in London’s history. Luckily for its shareholders, the stock’s performance has dramatically improved since. It has recovered all of its post-IPO losses and then some.
The stock recently hit an all-time high of just under 400p. I think this reflects improving investor sentiment towards the company. Last year’s jump in orders was not a one-off. Sales have continued to grow, and now the business is looking to the future.
But the question is, has share price got ahead of itself?
Deliveroo share price potential
When I covered the company at the beginning of August, I noted that the stock was selling at a price-to-sales (P/S) ratio of 5.2. That was roughly in line with its closest publicly listed competitor, Just Eat Takeaway.com.
Since then, shares in the meal delivery company have only become more expensive. However, I changed my view a few days after I wrote that article.
I changed my opinion after Delivery Hero, the Berlin-based food delivery group, acquired a stake in its UK-based peer. Delivery Hero’s chief executive went on to tweet that he had bought 5% of Deliveroo because the stock appeared “undervalued” and “oversold“.
That CEO knows far more than I do about the meal delivery sector. Therefore, while my own analysis shows the share price may be overvalued, I am more than happy to believe his view that the stock looks cheap.
As such, in my opinion, the stock continues to be a speculative buy. I would add the shares to my portfolio as a long-term growth play. That is after considering Deliveroo’s growth trajectory and room for expansion around the world.
Challenges ahead
As the meal delivery sector is incredibly competitive, the stock will remain a speculative investment in my eyes. Deliveroo has to compete with the likes of Uber and Just Eat. Both of these firms have deeper pockets and more customers.
To fend off the competition, the group will have to continue to spend heavily to entice customers and attract restaurants to its platforms.
There are also question marks hanging over the company’s labour policies. It recently announced it would be exiting the Spanish market after the government promised a law to give gig economy workers greater employment rights.
Moves like this are underway around the world. They could lead to significantly higher costs for the company. If costs suddenly rise, the group may have to hike prices, putting consumers off using the platform. This would clearly have a negative impact on the Deliveroo share price.
After considering these challenges, I would only invest a small portion of my portfolio in the enterprise as a speculative play.
