Under a pound, is the Deliveroo share price a bargain?

girl relaxing on settee in the street

Deliveroo (LSE: ROO) may be good at delivering tasty delights — but shareholder returns are not among them. Over the past year, the Deliveroo share price has crashed 72%. They now trade for pennies, at less than a quarter of the price at which they were listed on the London market last April.

So – does that make them a possible bargain for my portfolio?

What explains the plummeting Deliveroo share price?

That sort of value destruction does not just happen for no reason.

I think the shares were overpriced when they were listed. Tech shares were riding high in the first half of last year and the initial valuation reflected that. Indeed, on its first day as a listed company the shares had already tumbled as much as 30% at one point.

On top of that, investors have concerns about the performance of the business. Last year, revenue grew 57% to £1.8bn. But the pre-income tax loss also soared. It was up 40% to almost £300m.

For now, liquidity is not an issue as the company ended the year with £1.3bn in cash and cash equivalents. However, the it continues to make a sizeable loss. In the first half, the firm’s gross transaction value (which is not the same as its own revenue) grew by 7%. I see a fundamental challenge with the current business model. How can Deliveroo profitably scale its business model without racking up massive losses?

Where next for the business model

It is common for well-funded tech businesses to spend heavily refining their business model and growing their customer base. The hope is that they can later raise prices and cut out unprofitable operations.

Deliveroo may yet do that. There could be a pathway to profitability for the firm. But I also see some ongoing challenges. The service remains heavily reliant on human beings doing the delivery. Whether they are treated as employees or not, rising wage expectations could add to the firm’s cost base one way or another.

A worsening economic environment may also lead to people cutting back on luxuries like home food delivery, threatening revenue and profit growth. In the UK and Ireland, for example, the company’s year-on-year gross transaction value growth of 12% in the first quarter slipped to 4% in the second quarter. Its performance in other markets was worse, with growth falling from 11% to 1%.

I think Deliveroo has a long, hard road ahead of it to refine its business model and prove it can make a profit.

I’m not ordering

I expect food delivery to be a large business for years to come. Deliveroo has built a strong brand. The firm could yet turn into a highly successful business.

But I think a lot still needs to be proven. Even after the Deliveroo share price fall, the loss-making business continues to have a market capitalisation of £1.5bn. I do not see that as a bargain given the risks involved. I therefore have no plans to invest.

The post Under a pound, is the Deliveroo share price a bargain? appeared first on The Motley Fool UK.

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Christopher Ruane 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.