Over the past month, Deliveroo (LSE:ROO) shares have fallen by 28%. On Friday, the share price was hovering just above 200p. Recent developments have pushed the price lower, which leads me to wonder whether the shares could fall as low at 100p in the next year. As someone who bought at 390p from the IPO earlier this year, what’s my best option here?
Reasons for the slump
As I see it, there have been two main drivers for the move lower in Deliveroo shares. One is a longer-term issue over several months, the other is one that has surfaced in recent weeks.
The story that has hit the share price hard in the short term is news around employment contracts. The European Commission (EC) is attempting to regulate the gig economy, which involves people like Deliveroo’s riders. At the moment, these workers are classified as independent contractors. So, Deliveroo doesn’t have many obligations to them. That means no pensions, sick pay and other perks that actual employees would usually get.
Although there’s a moral case that the riders deserve some employee benefits, the Deliveroo share price has been falling on this news. The main reason for this is that it would increase the costs for the business. It would also increase the liabilities that the company would take on for employee welfare.
The longer-term issue I’ve noted is that there’s still uncertainty as to how demand will shape up in coming years. Lockdowns and other restrictions helped to boost demand in 2020 and part of 2021.
Even though some markets enjoyed a summer without restrictions, the rise of Omicron again will see people spending more time indoors. Therefore, I think some of the fall in Deliveroo shares in recent months is concern that Deliveroo is only doing well due to the pandemic, and fundamentally might not do that well in the long run.
The future for the stock
Personally, I struggle to see the Deliveroo share price hitting 100p next year. To fall another 50%, we would need to see some very poor financial results. Even if we saw the EC move forward with its proposals, I think the shares have already priced in the cost of this in recent days. Therefore, I don’t see that news story driving further significant weakness for the shares next year.
The flipside is that just because I don’t see the shares hitting 100p, do I see a move back to 300p+? This is a harder question. I think that Deliveroo will see higher demand in key markets over the winter due to Covid-19 restrictions. However, I’m not sure if investors will pay much attention to this, and they might see it as artificial demand.
In my opinion, I think Deliveroo shares will probably find a range between 200-300p until something new happens. Therefore, I won’t be looking to buy more at the moment and will sit on my hands.
Jon Smith owns shares in Deliveroo Holdings PLC. 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.
