Deliveroo Discounted, But is it a Buy?

New year tech drama and stock price volatility has handed Deliveroo the title of being one of the UK's most undervalued stocks, but is it a buy?

Sunniva Kolostyak 31 January, 2022 | 10:02AM
Facebook Twitter LinkedIn

Deliveroo delivery box

Volatility in the markets has landed Deliveroo (ROO) with the title of being one of the most undervalued stocks in the UK. The food app company has slipped down into five-star territory and is currently trading at a 58% discount. Does that mean it’s a buy?

It’s not been a great year so far for tech. The Covid-19 virus is still a major influence on markets and has added a lot of uncertainty to the mix, as has an apparent consensus over inflation. As such, investors are seeing less growth on the horizon for growth stocks.

Our indices show this clearly: the Morningstar US Technology and Communication Services index is down 10.9% so far this year. The Morningstar Developed Markets Europe Technology, which targets large- and mid-cap stocks listed in developed markets in Europe in the technology sector, is down 16.71% year-to-date. In comparison, both indices were up about 30% last year.

Beating The Competition

As my colleague James Gard explained a few months back, Deliveroo harnessed great excitement and buzz before its spring 2021 float, and UK investors were hungry for their own Coinbase success story. But the IPO caused some serious indigestion, and it took another three months for the stock to increase in value. Now, it has followed equity and tech stocks in taking a New Year tumble.

It is now down 30.14% so far this year, and 53.64% over the past six months. At its August 2021 peak, the price reached 397p, but in the past week it reached a record low, closing at 147p on Friday. By comparison, Morningstar analyst Ioannis Pontikis thinks the shares have a fair value of 350p.

A price correction is not always reflective of a company’s performance. Reporting on its fourth-quarter results, Deliveroo stated its gross transaction value was up 36%, while orders were up 42%. Over 2021, transaction values and order growth also reached the high end of Morningstar’s expectations for the company – a sign of robust online food ordering trends, according to Pontikis.

Recently, the company partnered with Amazon (AMZN), allowing Prime members to sign up for free Deliveroo Plus memberships. However, Pontikis says: “although the unchanged gross profit guidance should provide some comfort, the economic impact of this partnership is still unclear to us.”

Deliveroo's growth in the fourth quarter was higher than Just Eat Takeaway's (TKWY) largely flat numbers, but it is also tilted toward higher growth but lower or more uncertain unit economics businesses, like grocery and logistical orders.

A Blue January

That said, January has been a difficult month for equity investors. The market has been hit by relentless volatility, exacerbated by earnings season. For example, we we’ve written about whether it is time to sell tech, and last week’s editor’s column discussed coverage of the billions shaved off and on the market. And if you’ve been burned, read our market downturn first aid kit.

Lewis Grant, portfolio manager at Federated Hermes, says:

“The collapse in technology and growth stocks has eased – or perhaps paused – only to be replaced with wild swings as investors try to time the lows and bag a bargain. With so much volatility and uncertainty, it’s not obvious that there are any bargains to be had.”

Hargreaves Lansdown’s analyst Susannah Streeter adds that the said volatility has been a major driver in the Deliveroo share price downturn and sell-off.

“Tech-centric companies which launched onto the market with prospectuses full of promise over the last 18 months, are now seeing confidence in their business models fading fast, as the era of cheap money hurtles to a close.”

So what would make investors hungry for more? The takeaway space is filled with intense competition, and you shouldn't forget that Deliveroo is yet to make a profit as a public company. Updates from the business suggest consumers are still hungry for food delivery apps even after the repeated lockdowns, and that the industry itself still has some room to grow. The company's brand, service levels, market position and restaurant mix, plus a low capital intensity, lead us to believe it's well positioned to benefit from the trend.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Sunniva Kolostyak  is data journalist for Morningstar.co.uk