Shares in food delivery company Deliveroo (LSE: ROO) have experienced a dramatic collapse. Back in August last year, Deliveroo’s share price was near 400p. Today however, it’s below 90p.
Is this a buying opportunity for me? Or are there better stocks to buy? Let’s discuss.
Should I buy Deliveroo shares today?
Looking at the investment case for Deliveroo shares, I see a few risks that concern me. The first is a potential drop in consumer spending.
Right now, many consumers are feeling the pinch due to exorbitant energy and food costs. As a result, they are cutting back on discretionary purchases. Deliveroo could be impacted by this.
When people are trying to conserve money, one of the first things they often cut back on is takeaway meals. It’s worth noting that in the group’s recent Q1 results, it said that “consumer behaviour may moderate this year.”
Another major issue is the return to the office. After two years of remote working, many employees are now slowly returning to the workplace. This potentially has implications for Deliveroo as people may be less likely to have their lunch delivered while at the office.
On this issue, I have noticed that in London where I live, there are often many delivery drivers standing around waiting for orders during the day. This wasn’t the case 12 months ago.
A third risk for me is in relation to regulation. Recently, a French court ruled that Deliveroo had abused the freelance status of its riders and gave the company a €375,000 fine. Meanwhile, the European Commission is reportedly planning new rules that would force delivery companies to reclassify some of their workers as employees. This could have implications for future profitability.
Finally, the lack of profitability here is also a big risk, to my mind. For the year ending 31 December 2022, analysts expect the group to post a net loss of £234m. For the following year, they expect a net loss of £176m. The share prices of unprofitable companies can be highly volatile at times, especially during periods of uncertainty (like now).
Are the risks reflected in the share price?
Now, of course, it’s not all bearish here. There are things to like about the company. For example, recent Q1 results showed gross transaction value (GTV) growth of 12% year-on-year which is not bad considering that last year a lot of countries were on lockdown in Q1. For the full year, Deliveroo expects GTV growth of 15-25%.
The company has also struck some interesting deals recently with the likes of Amazon, Waitrose, and Carrefour.
Meanwhile, the valuation, using the price-to-sales ratio, is not high. It’s currently about 0.8. By contrast, US rival Doordash has a price-to-sales ratio of about 3.4. So all the risks I mentioned above could already be baked into the share price.
Deliveroo shares: my move now
Weighing everything up though, I think the best move is to leave Deliveroo shares on my watchlist for now. All things considered, I think there are better stocks to buy today.
