When food-delivery services provider Deliveroo (LSE: ROO) debuted on the London Stock Exchange last week, investors showed little interest in it. This is despite its high level of growth in 2020.
Yet, I think it is too soon to give up on the stock. Here are three reasons why.
#1. Deliveroo share price recovers
When it was first listed last week, the Deliveroo share was open for trading only to institutional investors. These include banks, pension funds, and hedge funds. Clearly, they were averse to the company’s share, or at least its listing price.
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But this Wednesday, retail investors started buying and selling the Deliveroo share too. The company’s share price quickly recovered by around 2%. This increase is small. But it does indicate that we could be looking at two different perspectives on the Deliveroo share. I think we will have greater clarity on overall investor sentiment in the coming days, as more share price data comes in.
#2. Resolvable issues
One reason why investors have stayed away from the Deliveroo share is the company’s hiring practices, a matter that has heated up further since it went public. Royal Mail is a good recent example of how conflict between management and workers can be bad for a company’s share price, encouraging investors to keep away.
Besided this, it raises ethical concerns among investors. But I think these can be resolved over time. Just Eat Takeaway, its delivery peer, recently partly ironed out the issue because of clearer legislation on gig-work, leading it to permanently hire many of its delivery riders.
I think the same can happen for Deliveroo.
If it hires more riders full-time, then its operating costs will rise. But as a fast growing company, so long as it gains market share in a still growing industry, to me as an investor, profits are a lesser concern for now.
#3. Think long term
The Deliveroo share is part of the growing online sales industry. I think its chances for success are increased purely because it operates in an expanding sector.
Besides this, consumer spending can rise not just post-lockdown but according to some forecasters, even over the next decade. This is positive for a food-delivery provider like Deliveroo, whose business could continue to boom even post-lockdown.
Risks to the Deliveroo share
The are still two risks to the Deliveroo share, however:
#1. Competitive market – While it faces the gig-work challenge together with Just Eat Takeaway and Uber Eats, they are significant competitors. Just Eat Takeaway is the market leader in the UK and Uber Eats is globally the most widely available service.
#2. Persistent labour issues – Issues regarding work conditions can be sticky. Amazon, an investor in Deliveroo, is still dealing with them. Its delivery drivers recently protested across Italy about unfair traffic tickets generated by an algorithm. AIM-listed boohoo is also still grappling with the after-effects from breach of minimum-wage requirements at its suppliers’ factories.
On balance, however, I like the Deliveroo share as a long-term investment, even if it takes some time to resolve its issues. It is a buy for me.
