What’s behind Deliveroo’s volatile share price?

The Deliveroo (LSE:ROO) share price had a bumpy ride last week. Despite achieving some notable growth and breaching the 300p mark, these gains were quickly reversed a few days later. Consequently, Deliveroo’s performance since its March IPO is around -5%. So what’s behind this volatility? And should I be considering this business for my portfolio?

Deliveroo’s share price climbs on earnings

So what caused the now-well-established food and groceries delivery service’s share price to rise last week? It seems anticipation had been building surrounding the group’s third-quarter results and they didn’t disappoint investors given the stock popped by 4% on last Wednesday’s news.  

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Beyond gross transaction volume (GTV) increasing by an impressive 58%, the business has been expanding its partner network. After the success of its grocery delivery venture with Waitrose, Deliveroo has since expanded its offerings through a new deal with Morrisons. This new division has been titled Hop and can deliver shopping in as little as 10 minutes.

Furthermore, the firm has also partnered up with Amazon offering a complementary year of Deliveroo Plus to Amazon Prime subscribers, allowing customers to avoid delivery charges on all orders over £25. Before this new venture, Deliveroo Plus represented around 15% of the total monthly active users. As of this latest report, that number has more than doubled.

With more transactions flowing through Deliveroo’s platform, management has increased its full-year GTV growth guidance from 50-60% to 60-70%. That’s quite encouraging, in my opinion. And I’m not surprised to see the Deliveroo share price rise on the news. So why did it fall again the next day?

Fears of slow down start emerging

Despite management raising its growth expectations for 2021, it seems not all investors are convinced. And they may be right not to be. While GTV is expected to continue climbing over the short term, it may not last over the long term.

Now that pubs and restaurants are offering dine-in services again, Deliveroo’s growth rate has already started to stumble. Although 58% growth is undoubtedly impressive, that’s down from 76% in the previous quarter.

And the company has said the average order value on its platform has also started falling. Therefore, last week’s U-turn in the Deliveroo share price could be explained by investors using the recent bump as an opportunity to jump ship.

The bottom line

Seeing the company establish new partnerships and expand its revenue stream is quite encouraging, in my mind. But I still remain sceptical about the future potential of Deliveroo and its share price. Despite operating in one of the most favourable environments for this business over the past year, gross profit margins for 2021 are still only expected to be a measly 7.5-7.75%. And net income is still nowhere in sight.

With that in mind, I’m still keeping Deliveroo on my watchlist for now.

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Zaven Boyrazian 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.

This post was originally published on Motley Fool

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