In the time that Deliveroo (LSE: ROO) has been listed on the London Stock Exchange, its share price has gone nowhere. If anything, it is trending downwards.Â
So why did I buy Deliveroo shares?
Because I am a believer in the company’s potential. Here is why.
Deliveroo’s financials are encouraging
One, its revenue growth is robust. It is true that 2020 was a particularly good year for delivery companies, and Deliveroo is no exception. Its revenues grew by a whole 54% during the year. But here is something to chew on. They grew by an even faster 62% in 2019.Â
Two, Deliveroo is loss-making, as fast-growing companies in expanding sectors can be. But I am encouraged by the fact that its loss has been shrinking. In 2020, it was at £226m, down from £317m in the year before.Â
Expanding beyond food delivery
Three, I like the company’s expansion beyond online food delivery for restaurants. It recently entered into a two-year partnership with supermarket Waitrose after a successful trial. Deliveroo will now expand to 110 locations across the UK.Â
In other words, it just entered another fast growing sector of online grocery deliveries in a potentially significant way. Online grocer Ocado‘s performance impressed last year, but it was growing fast even pre-pandemic. This too, is encouraging.
Resolution possible to gig riders’ terms
Four, Deliveroo’s business model that relies on gig delivery riders has raised difficult questions. But regulation across countries is under way to ensure better terms of work for them, so I reckon the challenge will be ironed out over time. This could result in higher costs for Deliveroo, but how much remains to be seen.Â
Long-term prospects strong
Five, over the long term, digital sales will increasingly be the way to go. It is for that reason that I am an investor in the likes of Ocado, Rightmove and now Deliveroo. The pandemic has only accelerated this process. Moreover, it has shown us the potential of these segments to grow fast.Â
The question of valuation
It is not all rosy for Deliveroo, though. One big criticism it has faced is steep valuation at the time of its initial public offering (IPO), which led to an underwhelming response from investors.
I think there is some justification for this. I compared Deliveroo’s market valuation with its closest peer, Just Eat Takeaway based on price-to-sales (P/S). It turns out that while Deliveroo’s P/S is 24 times, that for Just Eat Takeaway is 5.3 times.
This could change over time, though. If Deliveroo’s price stays as it is and its revenue grows by the rates seen in the last couple of years, its ratio would decline closer to 15 times.Â
Besides this, Just Eat Takeaway’s price may be negatively influenced presently by both the merger between the UK’s Just Eat and the Dutch Takeaway.com that created the company and its acquisition of te US-based Grubhub last year.
My takeaway
Keeping this in mind, I expect it will be a few months at least before Deliveroo’s share price sustainably picks up. But in the long term, I reckon it will pay off.