Are Deliveroo shares a buy after first-half results?

Food delivery company Deliveroo (LSE: ROO) had a choppy start as a public company. Deliveroo shares fell immediately after listing but have recently recovered. The shares were rising earlier this week as rival Delivery Hero took a stake. Then today (11 August), half-year results came out. As the stock market opened, Deliveroo shares were down 8%. 

Highlights from the results

• Gross Transaction Value (GTV) was up 102% to £3,385.8m. GTV growth was 131% in Q1 and 81% in Q2, showing continued strength despite reopening effects and an increasingly tough comparison base.
• Revenues were up 82% to £922.5m, primarily due to the increase in GTV, driven by an increase in monthly active consumers compared to H1 2020.
• The statutory loss before tax improved to £104.8m in H1 2021 compared to a loss of £128.4m in H1 2020.

Deliveroo is considering ending its operations in Spain. The food delivery group also revealed it can now reach 72% of UK the population, which is ahead of its target. And it now claims the largest number of active food merchants in the UK of all food delivery platforms.

The company maintained its upgraded guidance, stating it expects full-year GTV growth of 50-60%.

New growth opportunities

On-demand grocery is a new area of growth for Deliveroo. It has more than 4,600 grocery sites. and a partnership with Waitrose that the grocer’s boss, Dame Sharon White, has hailed as a key part of her turnaround strategy.

Deliveroo’s international segment comprises 10 markets across Europe, the Middle East and Asia Pacific. And it represented 48% of total GTV.

International growth in the first half was supported by strengthened relationships with restaurant partners, especially in France, Hong Kong and the UAE. Deliveroo is also rolling out its grocery offering: abroad and had about 900 grocery sites live with major partners across international markets (up from around 400 at the end of 2020), and more than 4,400 sites in total when also including smaller independent grocery partners.

Risks to look out for

Deliveroo is, even after joining the stock exchange, still a minnow in a massive industry. For instance, Delivery Hero operates in about 50 countries across four continents. Just Eat Takeaway has a market cap approaching £10bn versus Deliveroo’s of under £7bn. The former has also completed a $7.3bn (£5.3bn) takeover of Grubhub. Scale is vital in growth industries like this and I think Deliveroo could get left behind, as it already has in Spain.

Also, gross profit margins (as a percentage of GTV) fell 1% to 7.8%. Deliveroo put this down to accelerated investments to support future growth.

Thirdly, the food delivery group remain loss-making and as it expands, costs will rise so the route to profitability isn’t very clear for me to see. That makes me nervous as an investor as I want to back profitable companies with my money. 

Would I buy Deliveroo shares? 

Overall, Deliveroo is a high-growth group, especially by UK listed company standards. However, I prefer to invest in companies where I see a clear path to profitability and market leadership. For me, the risks with Deliveroo are too great. Even after today’s share price fall, I’m not tempted to buy the shares.