Shareholders in Deliveroo (LSE: ROO) have seen the shares bounce around like its namesake marsupial since the food delivery firm listed this year. The Deliveroo share price has lost about 24% since it listed. But with positive news at the company lately, some investors reckon that there could be brighter days ahead. What is my Deliveroo share price prediction? Here is what I expect from the shares over the coming year – and what that means for the prospect of adding them to my portfolio.
Business potential and fundamentals
When a company slumps from its listing price, as Deliveroo did, it often indicates that the flotation price reflected a significant amount of optimism about the firm’s future potential but market feeling is more doubtful. Another recent example in the UK is THG.
The potential for food delivery and indeed other delivery services more generally is clearly massive. But, as Warren Buffett explained when excluding certain types of shares from his investment consideration, it may be easy to spot a potentially massive industry in its early days but that doesn’t mean one can identify the winning companies within it. Deliveroo spooked the market in August when its interim results suggested that gross profit margins for the year may be lower than some investors had hoped.
The company’s third-quarter results last month boosted sentiment somewhat. The company increased its projection of full-year growth for what it calls gross transaction value to 60%-70%.
Deliveroo share price drivers
I think there are a couple of factors driving the current Deliveroo share price. First is an assessment of how big the company will ultimately be as the food delivery market grows and key leaders within it consolidate. On that front I am positive about the company’s prospects.
The more important second question is what the company’s future profitability outlook looks like. The company reckons it can achieve a gross profit margin this year of 7.5%-7.75%. But it is important to note that that is a gross profit. A lot of costs come out of a gross profit to produce the net profit or loss. So I don’t think the gross margin target means Deliveroo will stem its losses any time soon. But I do see it as an attractive short-term gross profit margin target.
Trading is strong, which is why the company upgraded its full-year transaction value estimate. The larger the company’s revenues, the better I think it is for the profit picture. Bigger revenues should bring economies of scale which can feed to the bottom line – although that isn’t guaranteed.
My Deliveroo share price prediction
I think positive news on profitability could well help the Deliveroo share price. I don’t expect that this year, as the company has reiterated its current expectation. But bigger scale could help profit margins next year. If it doesn’t, there’s a risk the Deliveroo share price could fall. But currently I am upbeat margins will improve, and therefore am bullish at the current price. But I think other companies offer better forward visibility and so lower risk. Therefore, I won’t be adding Deliveroo to my portfolio at the moment.
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Christopher Ruane has no position in any 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.
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