The gig economy, which can be defined as freelancers working on a flexible basis through digital employment platforms, is booming right now. Powered by advances in technology, this new style of working is disrupting the world’s employment markets, and overhauling the nine-to-five rules that were standard for so long.
One UK stock that offers exposure to this growth story is Deliveroo (LSE: ROO). The online food delivery company connects local consumers, restaurants, and grocers with delivery riders. But is an investment in Deliveroo shares the best way to capitalise on the growth of the gig economy?
I’m not convinced it is. I think there are better stocks to play this exciting long-term growth theme.
Deliveroo shares: the bull case
There are certainly some things to like about Deliveroo from an investment perspective. One is that the company is growing rapidly at the moment. In its first-quarter 2021 results, for example, the company reported group orders of 71m, up 114% year-on-year and gross transaction value (GTV) of £1.65bn, up 130% year-on-year.
Deliveroo also reported its monthly active consumer base had grown 91% year-on-year to 7.1m monthly active consumers on average during the quarter. Clearly, the company has momentum right now.
Another thing I like about Deliveroo is that the company is led by its founder Will Shu. He founded the company in 2013 and is a major shareholder today, so his interests are aligned with those of shareholders. Research shows that founder-led companies often turn out to be good investments.
Risks
One thing that concerns me about Deliveroo shares however, is the fact the company’s losing a lot of money right now. This year, analysts expect it to generate a net loss of about £257m. This adds risk to the investment case.
Another issue for me is that the company only provides exposure to one area of the gig economy – delivery. And I think we’ll see plenty of disruption in this space (ie drones) in the years ahead.
I’d buy these gig economy stocks
So, how would I play the booming gig economy? Well, one stock I really like in this space is Upwork, which is listed in the US. It operates the world’s largest freelance platform.
On this platform (which I use), there’s work for a wide range of skilled freelancers, including computer programmers, graphic designers, copywriters, business consultants, lawyers, and more. So it offers much broader exposure to the gig economy than Deliveroo.
It’s worth noting that Upwork isn’t growing as fast as Deliveroo (in Q1 2021 its gross services volume and revenue were up 41% and 37% respectively year-on-year). However, the company is expected to be profitable on a non-GAAP basis this year.
Another gig economy stock I like is Fiverr. It operates a similar platform to Upwork, offering digital services in 500 categories. However, it’s growing faster than Upwork. In Q1, it saw revenue growth of 100%. It is also expected to be profitable on a non-GAAP basis this year.
Of course, these gig economy stocks aren’t without risk. Both trade on relatively high price-to-sales ratios, which adds some risk.
Overall however, I think these two stocks have a lot of long-term potential. I’d buy them over Deliveroo shares to capitalise on the growth of the gig economy.