Many of the popular shares of yesteryear have fallen spectacularly out of fashion with investors over the past few months. However, Deliveroo (LSE:ROO) is one growth stock that’s rarely been in fashion since its disastrous market debut in March 2021.
The meal delivery company’s stock plunged 26% on its first day of trading. At 84p, the shares are down an incredible 70% overall.
Here’s why I won’t be ordering Deliveroo shares today.
No moat
Warren Buffett likes his companies to have a wide moat around them, and he likes sharks in the moat. That is to say, he looks for industries with very high barriers to entry. That’s also what I look for in my investments. Good examples of wide-moat companies include Coca-Cola, Visa and ASML.
The problem for Deliveroo is that the barriers to entry in the food delivery industry are very low. A quick search shows me that, beyond Deliveroo, there’s also Uber, Just Eat, Getir, Foodhub, and many other smaller players.
Internationally, there are thousands of competitors. There’s nothing stopping some of these companies from expanding to the UK one day and attempting to steal Deliveroo’s customers with discounted offers.
This cut-throat competition probably explains the difficulty the company has had expanding internationally. It currently operates in 12 countries, but has just quit the Netherlands.
Unconvincing business model
I just don’t think Deliveroo’s business model is scalable beyond a certain point. Entering new markets costs a lot of money, and the company is now in cost-saving mode as it desperately attempts to prove to the market that it can become profitable.
In its latest quarterly report, Deliveroo has warned that full-year growth will be at the lower end of expectations. Gross transaction value (GTV) was up 8% in reported currency terms to roughly £1.7bn, which isn’t too bad. But it doesn’t expect to be generating any form of positive cash flow until the back end of 2023 or some time in 2024.
Limited pricing power
I also think there’ll be further regulation of the gig economy in the future, which probably won’t be beneficial to the company. If Deliveroo has to pay its drivers more, then it’ll have to pass on those additional costs to its customers.
I just don’t think that’s realistic, though, especially as we enter tougher economic times. Consumers will simply go to other (cheaper) platforms, drive to pick the food up themselves, or stop ordering takeaways altogether.
Could Deliveroo be acquired?
To be fair, Deliveroo does have some brand equity, given that it’s a household name in the UK. This recognisability could make it an acquisition target for a larger company wanting to enter the food delivery space.
The most likely candidate here would be Amazon, which already owns a 16% stake in Deliveroo. Obviously, any hint of Amazon buying the company would likely send the shares much higher.
Even so, I don’t invest in firms on the basis that they might be acquired. I invest in companies that I think have – or are building – durable competitive advantages. And to me, Deliveroo doesn’t have any of these yet. So I’m giving the shares a wide berth.