The Deliveroo (LSE: ROO) share price has plunged around 40% since the middle of August. The sell-off has accelerated in the past few weeks, with the stock off 25% since the end of November. The shares have declined by 19% since the firm’s IPO at the end of March.
I have previously said that I would buy the stock considering its growth potential over the next few years. However, following recent developments, which have pushed the share price lower, I am started to change my opinion.
Changing regulations
In the past few weeks, regulators have started to turn up the heat on so-called gig economy businesses.
Ridesharing company Uber has lost several significant court cases here in the UK over worker rights. Meanwhile, in Europe, regulators have proposed changes that would influence the categorisation of workers.
Under the proposals, companies may have to reclassify some of their workers as employees if platforms determine their pay and meet several other criteria. These include setting conduct rules, appearance standards and supervising work through electronic means.
A platform will be considered an employer if it meets two criteria.
Deliveroo and many of its peers will almost certainly fall foul of these new rules. The overall impact the changes will have on the company is not yet clear, but it seems likely that costs will increase. For a corporation already struggling to earn a profit, this will set the business back significantly.
That said, I think the company and its peers will likely find a way around these new rules.
If the cost of employing staff rises, the company will just increase costs to consumers. It could also look to streamline the business model and employ staff on full-time contracts. This is something the company’s peer, Just Eat, is already doing in the UK.
Deliveroo share price risks
As such, I do not think these changes will be terminal for the enterprise. I think they will force the group to change its ways and may delay profitability.
Still, if the company is forced to put up prices, customers could start to move away from its platforms. I think this is the most considerable risk the corporation is facing today.
Nevertheless, I am encouraged by the fact that the consumers who flocked to the platform in the pandemic have, for the most part, stayed. This suggests to me that customers may be stickier than other business models.
Despite this fact, I am no longer bullish on the Deliveroo share price. With risks mounting, I am not a buyer of the stock today. And if I owned the shares, I would be selling.
I think the group will encounter some severe headwinds over the next few years, which will be challenging to navigate and may cost the company a significant amount of cash.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Deliveroo Holdings Plc and Just Eat Takeaway.com N.V. 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.
