Should I buy the all-time low Deliveroo share price?

Ordering a delivery only to find the same meal much cheaper later on can be annoying. That might be a feeling familiar to shareholders in Deliveroo (LSE: ROO). The sinking Deliveroo share price has hit an all-time low. It floated at £3.90 in March and hit £2.02 in Friday’s trading.

Is this a bargain or a value trap?

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Why is the Deliveroo share price cratering?

Deliveroo has consistently disappointed investors during its short life on the stock market.

Lately there’s been a raft of concerns for investors who continue to hold Deliveroo shares. Growing moves in Europe to grant workers’ rights to freelancers in the gig economy could impose additional costs on Deliveroo. That threatens to drive it to an even bigger loss. The founder and finance chief have both been selling shares, although the company said that this was to meet tax liabilities.

These concerns are weighing heavily on the Deliveroo share price.

How is the business doing?

The last update from the business was in October. At that point, the headlines were solid enough. What the company describes as “gross transaction value” was estimated to grow 60%-70% this year, an increase on previous estimates. Gross profit margin continued to be estimated at around 7.5%-7.75%.

Not everything was rosy, however. Average order value fell slightly. That could be seen as good, if it means that customers are willing to order delivery even on low ticket items. But it could also be bad for the company’s economics if it means the same cost base needs to be covered by lower revenues.

On top of that, while the gross profit margin news sounded good, I don’t think that metric ultimately matters to an investor like me. In the long term, it’s net profit that enables a company to pay dividends. So I don’t pay much attention to gross profit margin in isolation. The company’s pre-tax loss in its first half was £105m. I expect it to record a loss at the full-year level.

What could happen next?

Looking forward, I see some positive drivers for the Deliveroo business. Its revenue growth is very strong. A larger business will give it economies of scale which could help it improve its profitability.

I’m also not too worried by the prospect of higher cost due to changes in workers’ employment status. I think this is going to come in one form or another for companies such as Deliveroo but also rivals like Uber and Delivery Hero. Deliveroo already noted in its quarterly results that it is “exploring extending… enhanced (rider) entitlements to additional markets”. I expect such costs to be built into the economics of delivery services, including Deliveroo, a few years from now.

My next move on Deliveroo shares

Even after its heavy share price, Deliveroo commands a valuation of £3.7bn.

I think there is a lot of work to be done yet in establishing a sustainable position in the food delivery market. Currently companies like Deliveroo are continuing to build a position in the market. That is proving to be costly. I don’t like the economics of this business and see the risk of losses for years to come. Even the current Deliveroo share price doesn’t tempt me to add it to my portfolio.  

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Deliveroo Holdings Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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