Can Deliveroo’s share price serve up a return for investors?

Deliveroo’s [ROO] share price hasn’t delivered for investors. After what can politely be called an underwhelming debut in London, the stock has slumped almost 50% since its listing back in March last year.

Things did heat up last summer, with Deliveroo’s share price touching an intraday high of 396p on 18 August. Yet since then, it’s been downhill for the stock with few signs of recovery.

The steep falls seem to contradict improved business performance. Quarterly results show the online delivery app has been growing at a solid rate. However, despite a growing customer base, the company still cannot turn a profit - and that is hitting Deliveroo’s share price.

Is now the time for investors to dip buy? Or in a crowded market, should investors consider chowing down on another option?

Deliveroo’s share price gets a bumper delivery

After delivering a promising fourth quarter trading update, Deliveroo’s share price jumped over 6% during 20 January’s morning session to touch an intraday high of 180p.

In the update Deliveroo received a bumper order of demand thanks to the UK government's Plan B lockdown. In the fourth quarter, the company reported a rise in orders to 80.8m, up 42% year-on-year, while transaction value increased 36% to £1.7bn.

For the full year, orders came in at 300.6m, up 73% - hitting the top end of guidance. Grocery orders represented 8% of total transactions in the second half of 2021, up from 6% in the same period last year.

However, Deliveroo’s share price was unable to hold onto the gains. Having started the day at 177.85p, the stock closed 20 January at 172p as investors digested the update.

Can Deliveroo’s share price serve up a return for investors?

A strong fourth quarter update is all well and good, but with the lifting of Omicron restrictions, people going back out to restaurants and workers returning to the office, growth is likely to suddenly drop off.

Cost of living increases could also put a squeeze on people’s disposable incomes, resulting in fewer takeaway meals being ordered. Although, the opposite could also be true, with people cutting down on nights out in favour of a pizza on their sofas.

These factors, along with investors shying away from growth stocks, can be seen in Deliveroo’s share price, with the stock down over 30% as of Friday’s close. Rival Just Eat has also seen a 16% plus decline as it faces up to many of the same issues.

Still, Deliveroo seems confident that consumers will stick with the company post-pandemic, having upped projections for 2021 growth back in October.

The lack of 2022 guidance, however, makes judging Deliveroo’s profitability tricky, according to Jefferies analyst Giles Thorne, saying in a note that “the absence of 2022 guidance means we can’t yet frame near-term growth and profitability expectations.”

A reason for optimism could come from Just Eat, which published fourth quarter results in January. During the quarter, the Amsterdam-based company saw a 14% jump in orders and maintained its financial guidance for 2022.

"This is a giant market that's still in its infancy," Deliveroo founder and chief executive Will Shu (pictured above) said. "We're going to invest where we see appropriate, but we have got to do that with increasing levels of efficiency."

Where next for Deliveroo’s share price

How far the market grows will determine the future of Deliveroo’s share price. In the UK the market for online food ordering and delivery apps has grown 35% each year on average between 2017 and 2022, according to data from IBISWorld, with the market size by revenue now at £2.9bn.

However, investors hoping for profitability anytime soon may have to hold their breath. Research from Mckinsey and Company discussing the US online delivery market published in October said that due to the costs involved in last-mile delivery and increasing expectations for speed, ‘the cost of delivery is unlikely to decline substantially.’ While that is a different market from the one Deliveroo operates in, it’s not a stretch to say many of the same issues will apply.

Will Shu has said that guidance for 2022 will come when Deliveroo reports full year results on 17 March - a must-watch for investors sizing up the opportunity in the online delivery service.

Among the analysts polled by Refiniev, Deliveroo’s share price has a 317.50p average price target - suggesting a 118.2% upside on Friday’s close.