A 46% drop year-to-date in the Deliveroo (LSE: ROO) share price leaves the takeaway titan rapidly approaching penny stock status. Will it get there? And would I buy it if it did?
Penny stock in the making?
Based on recent trading, investors might think it surprising that Deliveroo stock might be about to fall below £1 a pop.
Earlier this month, the company revealed gross transaction value (GTV) growth of 12% year-on-year in Q1. Order numbers rose 18%. This was regarded as a “strong performance” given that the same period in 2021 included lockdown restrictions in markets where it operated (and therefore greater demand from people who’d otherwise go out to eat). In other words, trading since its pandemic purple patch has been pretty resilient.
Full-year guidance has been maintained, which is more than you can say for some stocks. GTV is expected to come in somewhere between 15% and 25%, with a higher growth rate in the second half of the year.
The curse of higher prices
Unfortunately, this positive news has been offset by worries about rising costs relating to EU rules on rights for gig workers. The general rotation away from growth stocks by investors hasn’t helped either.
And then there’s the elephant in the room… inflation. The cost of living has been galloping higher, placing greater stress on discretionary incomes. Wages simply haven’t been rising at a rate to sufficiently offset higher prices.
Unless you’re Will Shu. Deliveroo’s CEO enjoyed a 16% jump in his pay packet last year. That’s got to leave a pretty bad taste in the mouth of its couriers. I may have even prompted some shareholders to sell up.
Add to this rising competition and a hardly buoyant stock market and I reckon the probability of Deliveroo falling below £1 is actually pretty high.
Already factored in?
It’s all relative, of course. Takeaways are more expensive than cooking something from scratch. However, they’re also less pricey than a meal out. So maybe the impact of inflation may be less than I (and other market participants) believe it will be. And by clearly stating its belief that business may “moderate” in the months ahead, the company has stolen a march on its critics and adjusted investors’ expectations in advance.
Another positive is the amount of cash on Deliveroo’s balance sheet. Unprofitable it may be, but there’s little chance of this business going bust in the near future. Elsewhere, the collaboration with Amazon appears to be going well. A pilot with WHSmith is also underway.
One thing I’ve also noticed is that the company isn’t really attracting short-sellers at the moment. This arguably suggests traders don’t see the potential for the Deliveroo share price to drop much further.
My verdict
Despite current headwinds, there are things to like about the £2bn-cap, including a strong brand and opportunities for growth.
That said, I’m still not especially eager to buy, given that prices look set to keep rising. And that’s despite me stating last December that I would be more interested in acquiring the stock if it dropped another 50%.
If I were looking to take the battle to inflation with my stock picks, I can think of far better candidates. Above or below £1, Deliveroo still isn’t for me.