I ordered not one but two meals through Deliveroo (LSE: ROO) in recent days. But while they were a bargain for me, heavy discounts on both probably meant that my custom added little to Deliveroo’s profitability. The share price is now also heavily discounted compared to a year ago. During that time, it has fallen 71%.
So does that present a buying opportunity for my portfolio? Or might the shares keep declining until they sell for 50p each, or even less?
Wrong business model, wrong time
The decline in the share price reflects a changing landscape for delivery companies like Deliveroo.
Its basic business model seems flawed to me. The cost of attracting customers and retaining them, along with delivering individual orders, can be high. But firms only have limited ability to add extra costs onto the delivery price before many customers decide they can just pick up their own food.
Several years ago, investors were excited about the potential market opportunity of digital platforms for home delivery. The pandemic had unleashed huge demand and money poured into businesses such as Deliveroo. It timed its stock market listing in March 2021 well to take advantage of that investor enthusiasm. But from its very first day as a public company, the share price started to fall.
Tech stocks are now less popular with many investors than they were a year or two ago. I think the decline in the Deliveroo share price reflects both this shift in sentiment and its continued failure to turn a profit.
The opportunity for Deliveroo
However, all is not lost for Deliveroo. It has a large established customer base and brand recognition. Indeed, that familiar branding was why I decided to try the service out recently.
I do think there will be strong long-term demand for food delivery and the company is a leading player in the space. That could help it keep growing sales.
If it can figure out the right business model to make individual food delivery at scale profitable, I think Deliveroo could do well as a business. Even if another company cracks that challenge and Deliveroo simply changes its business model to ape the successful one I think it could have a bright future.
For now though, there is no sign that that is about to happen any time soon. Indeed, in its half year results, the company recorded a loss before income tax that was 54% higher than the same period last year, even though sales had risen.
Where next for the share price?
If losses keep mounting, I think investor confidence in the company’s business model could further erode. That might push the shares down further. I would not be surprised if they fall below 50p at some point, for example if Deliveroo issues a profit warning, or its full-year results are worse than expected.
I do not want to invest in the business until it has proven its business model can be consistently profitable. Signs of that could push the shares up. But even though the Deliveroo share price is in pennies, I will not be adding it to my portfolio just yet.