As I’ve mentioned before, I was allocated shares in the retail participation of the Deliveroo (LSE:ROO) IPO earlier this year. I thought that on balance it was a good investment at the time. Unfortunately, the Deliveroo share price fell on the first day of trading, and it has had a rough time since. In fact, from the opening IPO level of 390p, it closed yesterday at a price of 256p. Thus far, it hasn’t reached the initial IPO price again. Will it ever?
Reasons to be positive
I’m nowhere near ready to throw in the towel and sell my shares. There are several reasons why I think the future is bright for the company. These should support the Deliveroo share price moving higher into next year and beyond, in my opinion.
Firstly, its finances are showing good growth. In April, I got the first in-depth look at performance via the Q1 results. It showed global orders up 114% versus the same quarter last year at 71m. In turn, Q1 2020 saw growth of 27% versus the same period in 2019.
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I think this helps to highlight that the growth being seen isn’t simply due to lockdowns. Double-digit growth was being seen even before the pandemic hit. Over time, this realisation could see the Deliveroo share price move back towards 390p.
Another element that I think shows that the company is stable for the long run is average monthly orders per customer. This hasn’t changed over several quarters, and is between three and 3.3. If the growth was being driven mostly by consumers staying at home, I’d expect to see more variation in this figure between the different lockdowns.
I think global orders can continue to grow with the pursuit of new markets and deepening existing ones. The company was able to raise over £1bn in funding during Q1, giving it cash and cash equivalents of around £1.5bn. This allows the growth strategy to be pursued without the financial constraints that other companies might have.
Patience needed on the Deliveroo share price
Despite this positive outlook, the Deliveroo share price hasn’t been moving higher. I think that one major point potential investors are looking for is a turn towards profitability. After all, the business lost money in 2020 and 2019. Making a bit of money could be enough for investors to look to get on board.
The other element that I think is holding the Deliveroo share price back from breaking 390p is the concern that this price would overvalue the business. I do admit that a growth stock like Deliveroo is hard to pin an accurate valuation on. Yet a host of analysts at the banks that underwrote the IPO thought 390p was an accurate price. So I don’t really take the overvalued argument that seriously.
Overall, I do think that the Deliveroo share price will break above 390p eventually. However, I think it’ll take time. Time to prove whether the pandemic artificially boosted demand. Time to show whether it can become profitable in 2021. Ultimately, I think it can achieve this, and so would look to buy if I wasn’t already invested.
