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Should I buy Deliveroo shares?

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·3-min read
A Deliveroo rider cycles in London
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Deliveroo (LSE: ROO) shares rose 9.3% on Thursday after a UK court ruled its riders as self-employed. This is the fourth judgment in the UK that supports Deliveroo’s position. The company works with over 100,000 riders globally.

Here, I would like to analyse the company to see if this is the right stock for my portfolio.

Deliveroo company’s fundamentals

Deliveroo’s GTV (gross transaction value) grew 64% to £4.08bn in 2020. It is an important metric for e-commerce companies. Mostly, revenues are in proportion to GTV as they are calculated as a fixed percentage. GTV is the total value paid by consumers. It includes the total food basket, net of any discounts and consumer fees, and including taxes. In the most recent quarter, GTV grew 130% to £1.65bn.

The company’s 2020 revenue grew 58% to £1.2bn. The growth is robust, which is positive. It generates revenue from commissions, consumer fees, and restaurant and grocer sign-up fees. The monthly active consumer base has grown 91% year-over-year to 7.1m active consumers on average in the first quarter of 2021.

The company reported a loss of £226m for the year 2020. However, the adjusted EBITDA (earnings before interest, taxes, depreciation, and amortisation) reduced from a loss of £198m in 2018 to a loss of £12m in 2020. In addition, it was profitable on an adjusted EBITDA basis in two quarters in 2020, which shows that the margins are improving.

Deliveroo shares are currently trading at a price-to-sales (P/S) ratio of 4.0. Its US competitor DoorDash is trading at a P/S ratio of around 16. Thus, the company is trading at a discount to its US competitor. However, DoorDash has a greater scale and is growing faster, which, in my opinion, are the reasons for the wide valuation gap.

Risks to consider

The company’s business model will be at risk if it has to classify its riders as employees in the future. This is the case of fellow gig-economy operator Uber, which recently had to classify its UK drivers as employees instead of self-employed. In the case of Deliveroo, it will save from paying sick pay and various other benefits. However, many large funds have stayed away from investing in Deliveroo shares because of this particular issue.

The company has a dual-class share structure. It means that the founders will have greater voting rights. While there are merits, as they have better knowledge of the business, it means minority shareholders will have less say in important decisions. Also, the company’s entry will be restricted into the FTSE 100 index, due to its structure. It loses the benefit of passive funds investing in Deliveroo shares.

Final view

I believe there is strong growth in gig economy companies. Deliveroo shares are trading at a P/S of 4.0, which is not expensive, in my opinion. However, the company’s losses are a bit of concern for me, and I will keep the stock on the watchlist for now.

The post Should I buy Deliveroo shares? appeared first on The Motley Fool UK.

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Royston Roche has no position in any of the shares mentioned. The Motley Fool UK has recommended Uber Technologies. 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.

Motley Fool UK 2021

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