The Deliveroo (LSE: ROO) share price has plunged a staggering 60% since the middle of August. Over the past year, or since the company’s IPO, the stock has slumped 50%.
For someone who only recently turned positive on the outlook for the enterprise, this recent performance has been a bit of a shock.
When the corporation initially hit the market, I was sceptical about its potential. I thought the business was benefiting from an artificially-inflated delivery bubble, driven by the pandemic lockdowns. I thought it seemed unlikely the company’s sales volumes would continue at pandemic levels.
As it turns out, I was wrong. According to recent trading updates, not only have the company’s customers stayed with the business, but they have continued to order more.
Fundamental performance
According to the latest trading update from the business covering the fourth quarter of 2021, the overall gross transaction value on the platform increased 36% year-on-year. The overall gross transaction value increased 70% throughout 2021.
This is a fantastic performance, especially considering the uplift the company received during 2020. The fact that the business has continued to grow, even as the world has opened up, suggests consumers love what it offers.
Even though they are usually charged a premium to order on Deliveroo, rather than picking the order up themselves or eating in, it seems users are willing to pay for the service.
Unfortunately, the enterprise is struggling to turn this growth into profit. Despite two years of breakneck growth, the business is still haemorrhaging money. This is concerning. If Deliveroo cannot turn a profit in what has to be one of the most favourable environments the company will ever see, can it ever earn a profit?
This seems to be one of the main reasons the Deliveroo share price has been falling. It appears to be a jam-tomorrow business. But tomorrow still seems a long way away.
Competition seems to be another factor. The food delivery sector is incredible challenging, and keeping up with competitors is costly. This is probably the biggest factor the group faces right now.
Deliveroo share price outlook
So should I buy or avoid the company after its recent declines?
I still think the business has excellent growth prospects. I also believe there is potential for further consolidation in the food delivery sector. This could reduce competition and help firms like Deliveroo increase their profit margins.
Further, the company is trying to branch out into different delivery sectors, such as pharmaceuticals and groceries. These initiatives may help the business improve profitability by reaching a new subsection of customers.
Therefore, I would buy the business as a speculative investment for my portfolio. This is a high-risk play, but as the Deliveroo share price continues to slide, I think its valuation is becoming more attractive, improving the opportunity.
Rupert Hargreaves 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.
