When I last looked at online food delivery firm Deliveroo Holdings (LSE: ROO), I was impressed by the company’s strong growth. Wednesday’s half-year results confirmed this story. By Friday afternoon, Deliveroo’s share price was up by 10% on the week.
Deliveroo’s IPO made headlines when the shares slumped shortly after trading started. But the stock has bounced back since then and is up by 30% since March. Rumours are now circulating that the company could be a takeover target. I’m wondering if Deliveroo could be a good fit for my portfolio.
Lockdown boosts demand
Deliveroo handled £3,386m of orders during the first half of the year — more than double the value processed during same period in 2020.
Sales were obviously boosted by lockdown and work-from-home. Even so, I think this figure shows the company’s core food delivery service is still winning new fans. Deliveroo says it now has more food merchants than any other UK delivery service and can deliver to 72% of the UK population.
The company takes a slice of every order and revenue rose by 82% to £922.5m during the half year. However, Deliveroo’s costs appear to have risen faster than its revenue, due to higher spending on marketing. The company reported a half-year pre-tax loss of £105m, only slightly improved on the £128m loss recorded last year.
Is this the next big takeover?
Deliveroo’s strong results were overshadowed by news that Germany-based Delivery Hero has taken a 5.1% stake in the group, buying Deliveroo shares at an average price of 270p. This suggests to me Delivery Hero boss Niklas Oestberg can see long-term value in this business.
Of course, as the founder of a food delivery company, Oestberg is likely to be bullish on this sector. But Delivery Hero is already a far bigger business than Deliveroo, with revenue expected to hit €5,674m in 2021. Combining with Deliveroo could help Delivery Hero dominate the UK market.
Oestberg says he has no plans to bid for Deliveroo at the moment. But I wouldn’t be surprised if the two companies did combine at some point in the future. Size matters in this business, as companies with a large, dense network will find it easier to make money.
Deliveroo share price: next stop 500p?
I’ve been taking a quick look at Delivery Hero, and I’ve noticed that the German company’s shares are more expensive than those of Deliveroo. The former’s shares trade on 5.1 times forecast sales, compared to 3.8 times for the latter.
My sums suggest that Deliveroo’s share price would have to rise to 500p match Delivery Hero’s valuation. So ROO stock would have to rise by another 33% to reach that figure. That might seem far-fetched at the moment, but if the group’s strong growth continues then I don’t think it’s difficult to imagine.
The main risk I can see is the time it will take for Deliveroo to become profitable. The company needs to get bigger before this can happen, but it’s unclear to me how long this might take. If investors run out of patience before Deliveroo moves into the black, then the shares could slump.
For me personally, Deliveroo’s lack of profitability rules it out as a potential buy. It’s a bit too speculative. But I do think it’s possible that the shares could continue to rise.
