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Does Deliveroo’s share price have a 93% upside? Analysts at Jefferies think so.

Deliveroo’s [ROO] share price has failed to deliver for the last few months. Since hitting a year high of 396.8p on 18 August, the stock has fallen to 266.7p as of 26 October’s close. Strong third-quarter results and signs that food delivery services like Deliveroo are here to stay post-pandemic are positive signs. Yet the company is still operating at a loss.

To fuel growth, Deliveroo is looking to expand further into the grocery market - and analysts at Jefferies believe this could turbocharge the share price. 

 

Deliveroo’s share price set to gain on grocery expansion

September saw the launch of Deliveroo’s first delivery-only grocery store in central London. The ‘Deliveroo Hop’ service allows customers to order groceries for delivery in under 10 minutes. Deliveroo is responsible for the site and delivery, while Morrisons [MRW] will act as wholesaler.

Jefferies describes the service as a ‘step change’, as reported by ProActive investors. It allows Deliveroo to transplant the restaurant model it uses for its Editions service - where so-called 'dark' or 'cloud' kitchens prepare food for delivery-only customers - to the world of rapid-delivery grocery shopping.

The rapid delivery service will complement Deliveroo’s existing grocery service - which already delivers from over 4,600 grocery stores across the UK.

“For us, Deliveroo was every inch the operator for a premium rating except for its lack of exposure to dark stores. With Hop, that gap has now closed," write the Jefferies analysts.

Jefferies rates Deliveroo a Buy and has a 435p price target on the stock - a near 93% upside on Tuesday’s close.

 

Strong earnings boost Deliveroo’s share price

Deliveroo’s share price jumped more than 3% on Wednesday after the company reported strong Q3 earnings.

In the third quarter, gross transaction value (GTV) was up 58% YoY, coming in at £1.6m compared to last year’s £1.03m. Orders jumped to 74.6m, up 64% from the 45.4m seen in the same period last year. Average over value for the quarter was £21.4, down 6% from £22.8 year-on-year.  

Despite the drop in order value, the strong results meant Deliveroo was able to increase its forecast GTV to 60-70% growth for 2021, up from 50-60%.

"While we are mindful of current and potential macroeconomic disruptions and uncertainties, we expect further strong performance in the remainder of the year and we are increasing our full-year [gross transaction value] growth guidance," said Founder & Chief Executive Will Shu (pictured above).

Deliveroo reported that it had doubled its Plus partnership subscribers citing its partnership with Amazon Prime. Amazon [AMZN] has a 12% stake in Deliveroo and the tie-up means UK and Ireland Amazon Prime subscribers can sign up for free Deliveroo Plus membership for a year, with unlimited free delivery on orders over £25/€25.

“While we are mindful of current and potential macroeconomic disruptions and uncertainties, we expect further strong performance in the remainder of the year and we are increasing our full-year [gross transaction value] growth guidance" - Deliveroo Founder and Chief Executive WIll Shu

 

In previous half-year 2021 results, Deliveroo had reported an adjusted EBITDA loss of £27m compared to £30.3m in H1 2020. The company cited higher gross profit being offset by increased investment in growth behind the losses. Revenue for the first half of the year came in at £922.5m, up 82% year-on-year.

 

Where next?

Last year the share prices of food delivery companies popped - no surprise there considering the population was under lockdown. What is surprising is that food delivery apps are continuing to be in demand, even with people once again dining out.

"Food delivery app usage has not slowed down, even as consumers return to in-person dining more frequently," Alisha Kapur of Similarweb told Reuters.

Kapur says that it is rare for customers to switch apps with "a few exceptions that demonstrate the largest players are only grabbing more share". As food delivery companies continue to lose money and the need for scale, Kapur believes that the industry is ripe for consolidation.

Considering the size of Deliveroo and its backing from Amazon, should consolidation happen then it could help the company increase market share. Along with an expansion into grocery, Deliveroo’s share price could start to deliver for investors.

“Food delivery app usage has not slowed down, even as consumers return to in-person dining more frequently” - Similarweb Industry Consultant Alisha Kapur

 

Among the nine analysts polled on Refiniv, Deliveroo’s share price has an average 405p price target, suggesting a 80% upside on Tuesday's close. The highest price target is 470p, while the lowest is 225p. 

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