Deliveroo (LSE:ROO), one of the most famous food delivery companies, has been growing fast in price in recent years. In my opinion, this is one of the most exciting companies in the FTSE 250, and there is likely much more room for it to develop.
With a strong international expansion plan underway and clever operational strategies, Deliveroo is arguably a top investment for me to consider owning.
Lots of future growth potential
The company operates in 12 countries currently, and I’m impressed by its agile international strategy. It’s entered and exited various markets to optimise results. For example, it exited Germany, Taiwan, Spain, Australia, and the Netherlands, while launching in new markets like Kuwait and Qatar.
Furthermore, to support its growth, Deliveroo is expanding its grocery delivery service. This has already shown strong performance in the UK and the United Arab Emirates.
It’s also expanding into non-food retail, like for toys and electronics. Furthermore, Deliveroo Hop, its rapid grocery delivery service with faster delivery times and a wider selection of grocery items, could attract more customers.
The shares aren’t cheap
While the company has a favourable international market position, the shares are definitely not cheap. With a price-to-sales (P/S) ratio of 1.21, which is much higher than the industry median of 0.64, this is certainly a risk.
However, the market has priced the investment richly for a reason. It has delivered very strong revenue growth over the past five years, of 34% on average.
In my opinion, the stock is not too expensive to invest in. However, I’m certainly not considering it for a big allocation in my portfolio, if I do invest because there is still a higher risk of volatility due to the P/S ratio.
Its margins could come under pressure
Deliveroo has major competitors, including Uber Eats and Just Eat, and has a reduction in market share from direct-to-consumer delivery, like Domino’s provides.
The food delivery industry also has low margins, driven by high labour and operational costs. Currently, the company has a net margin of just 2.6%. Therefore, it also has less free cash flow. This means it can develop less financial security than one may want from an investment.
Given the competition, it’s likely fair to assess that Deliveroo could face future pricing pressure. This is also very true during a time when automated delivery could become commonplace. If management fails to introduce the correct technology innovations, it could be undercut in price by other delivery providers that do so successfully.
However, this business is still in its early days, and I expect its net margin to expand. It only reported positive free cash flow and profit for the first time in 2024.
I’m waiting for a better valuation
Deliveroo is a service I use often, and it’s an investment that I believe has a lot of room to grow in value over the long term.
I’m definitely bullish on these shares. However, because the valuation is quite high, I’ve decided not to invest just yet. Instead, I’m going to see if it becomes cheaper at a later date; then, I’ll buy my stake.
This post was originally published on Motley Fool
