I am on the lookout for the best growth stocks to add to my portfolio. One growth stock I want to take a closer look at is Deliveroo (LSE:ROO).
Growth stocks are companies expected to grow sales and earnings at a faster rate than the market average. They usually operate in emerging and growing industries. Current examples of such industries are e-commerce, cyber security, and technology-driven delivery businesses.
Disastrous IPO
The rise in popularity of working from home and suburban office spaces has meant food delivery businesses have risen in popularity in recent times. This was boosted by the pandemic when restrictions came into force. Many of us were unable to frequent our favourite eateries.
Deliveroo floated on the London Stock Exchange (LSE) with a value of £7.6bn, at 390p per share. The initial public offering (IPO) was disastrous. The shares closed at 287p after the first day of trading, which is a 41% decrease. The shares have been on a downward trajectory for some time. They are not being helped by recent macroeconomic trends and a stock market correction.
Deliveroo shares are currently trading for 104p. At this time last year, the shares were trading for 263p, which is a 60% decline over a 12-month period.
Positives and negatives
Since its inception, Deliveroo has continued to access and gain market share in new territories. An example of a potentially lucrative and exciting partnership is its agreement with Amazon, which could boost both performance and shares. It also recently started a pilot with WHSmith that could also boost growth.
Deliveroo has lots of cash on the books, which could be considered rare for a growth stock. This could could help boost growth and potential returns too. Its most recent trading update was for Q1 2022, released last month. Gross transaction value (GTV) was up 12% compared to the same period last year. The Amazon partnership expanded into new territories and FY 2022 guidance has been maintained with a forecast of 15%-25% GTV growth. The number of orders across the group also increased compared to Q1 in 2021.
Soaring inflation and rising costs has placed pressure on the pockets of households. This could affect Deliveroo’s order numbers, performance, and growth. In addition to this, Deliveroo couriers are classed as freelance gig workers. EU rules relating to gig worker rights have become a point of contention recently and could impact investor sentiment. Any changes to the rules could increase Deliveroo’s costs as well.
A growth stock I’d avoid
Deliveroo shares look beaten down right now, with a substantial share price drop since its IPO. In addition to this, the business is unprofitable despite other positive aspects gleaned from recent updates released.
I invest for the long term so now could be a chance to pick up Deliveroo shares cheap and watch them grow.
I wouldn’t buy Deliveroo shares for my holdings currently. Macroeconomic headwinds are putting me off and I want to see some level of profit before I decide to invest my hard earned cash. I will keep a keen eye on developments, however.