Due to the pandemic, food delivery companies saw significantly increased demand last year. As such, revenues of many of these companies have soared. But this has not necessarily been accompanied with profitability, with both Just Eat Takeaway.com (LSE: JET) and Deliveroo (LSE: ROO) still posting heavy losses. So, would I buy either of these UK stocks now?
Despite receiving a boost during the first few months of the pandemic, the Just Eat share price has been in decline recently. In fact, in 2021, it has fallen around 20% so far, currently priced at 6,800p. Here’s why I think Just Eat may now be underpriced.
Firstly, the recent first-half trading update for 2021 was positive. In fact, revenues were 52% higher than last year at €2.6bn. This reflected the fact that active customers had increased to 98m, up 21% from the year before. In the UK, customers also ordered an average 3.2 times a month, up from 2.5 times a year ago. This demonstrates that investment in the company, including the increased advertising during the Euros this summer, has been paying off.
Even so, this increased advertising, alongside the costs of seeing more of its couriers becoming employed workers (rather than the previous self-employed gig economy arrangement), saw pre-tax losses widen to €395m. The UK business accounted for €71m of this loss, and the US business also struggled. This unprofitability is evidently a risk for this UK stock.
But I still feel that Just Eat offers upside potential. This view is also shared by one of JET’s largest shareholders, Cat Rock. This activist investor blamed JET’s share price fall on “broken communication” with investors, and believes this has left the company deeply undervalued and vulnerable to a hostile takeover. Cat Rock also wants the company to divest some assets outside of the core European business. Hopefully, this will lead to change at JET, which may help to prop up the share price. This is why I’m tempted to buy.
After its hugely disappointing IPO this year, Deliveroo has rebounded nearly 40% and is currently priced at just under 400p. This is due to a large amount of good news in recent weeks. For example, in the recent trading update, it was revealed that first-half revenues were up 82% from last year to £922.5m. The statutory loss before tax also improved to £104.8m compared to £128.4m last year. Of course, like JET, this unprofitability remains a risk, especially as the company is already valued at around £8bn.
But there is no doubt that this UK share has great growth potential. Further, two weeks ago, the company’s rival and peer, Delivery Hero, took a 5% stake in Deliveroo. This is potentially because Delivery Hero doesn’t operate in the UK, and it feels that Deliveroo offers a strong opportunity in the country. This implies significant amounts of optimism.
Which UK stock would I buy?
I feel that both delivery companies offer growth potential, despite my fears around their unprofitability and the vast competition in the sector. Nonetheless, I am optimistic that JET is making better progress to profitability, especially as many of its European operations (with the exception of the UK) are already profitable. This means that I think JET is the better UK stock for me to buy today.
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- Why I think the Deliveroo share price could be a takeover target
- Deliveroo shares are climbing close to 400p! How high could it go this year?
- The Just Eat share price starts to recover. Will it continue in September?
- Just Eat shares are down 20% in 2021. Should I buy now?
- Where will the Just Eat share price go in September?
Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.