The Deliveroo (LSE: ROO) share price seems to be the investment the market loves to hate.
After its disastrous IPO, the stock dropped to a low of 233p at the end of April. However, over the next few months, it rallied to nearly 400p, before collapsing again. Today, it is changing hands at 273p.
Deliveroo share price challenges
Analysts and financial commentators have given numerous reasons explaining why the stock has underperformed. These range from the group’s hefty losses, to competition, rising costs and concerns about the gig economy.
All of these risks and challenges are valid. Deliveroo is facing aggressive competition from the likes of Uber Eats.
Regulators are also clamping down on companies that employ gig workers. Deliveroo pulled out of Spain earlier this year due to new worker legislation, which made it difficult for the group to operate in the country.
I think it would be silly to overlook these threats, which will only become more pressing for the company and its competitors as we advance.
Nevertheless, I also think the market is spending too much time concentrating on these risks and not enough time on the potential opportunities.
Group opportunities
I think the market is overlooking Deliveroo’s future potential. Over the past two years, there has been a step-change in consumer sentiment around home delivery.
Before the pandemic, ordering meals, groceries and pharmaceuticals to the front door was considered an to be more of a luxury. Now consumers see it as much more the norm.
It does not look as if this trend is going to change any time soon. Many analysts were expecting Deliveroo’s sales to decline as the economy reopened after the pandemic. They have not. Just the opposite is happening, in fact. Sales increased 82% year-on-year in the second quarter.
While it is true that the company is facing increasing competition, it also has an ace up its sleeve. As well as offering a broader range of products than its competitors, including agreements with supermarket retailers and Boots chemists, Deliveroo also counts Amazon as a backer.
The two parties recently unveiled an agreement whereby Amazon Prime members can sign up to free Deliveroo Plus membership for a year. This gives customers access to unlimited free delivery on orders over £25.
I think this is a substantial competitive advantage. It leverages Amazon’s brand strength with Deliveroo’s on-demand delivery service. And I think there could be further agreements in the pipeline. If the deal works for both parties, I can see the partnership growing.
Considering this advantage and the general change in consumer habits, I think the market is missing the potential here. That is why I would buy the stock for my portfolio today and ignore short term volatility while concentrating on Deliveroo’s long-term opportunities.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Deliveroo Holdings Plc and has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. 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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