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Will full-year earnings help the Deliveroo share price bounce back?

Deliveroo share price: Deliveroo logo on mobile device

Deliveroo’s [ROO] fourth-quarter trading update failed to boost shares in the online food delivery group, despite revealing a strong order book in the last quarter of 2021 ahead of its full-year earnings call.  

In a trading update published in January, Deliveroo reaffirmed a full-year gross transaction volume (GTV) increase of 70% year-on-year to £6.6bn, which was at the top end of guidance provided in its third-quarter earnings report. GTV for the fourth quarter was up 36% year-on-year, representing a slowdown from the third-quarter increase of 58%. Meanwhile, orders rose 42% to 80.8 million in the fourth quarter, pushing total orders for the trading year to 300.6 million, up 73% from 2020. 

“Despite a challenging backdrop, we continued to strengthen our customer proposition, widen our customer base and execute against our strategy,” Will Shu, founder and CEO, said. 

Competition derails Deliveroo shares growth

Investor sentiment has turned against Deliveroo, despite the company’s positive update ahead of its full-year 2021 earnings announcement on 17 March. Like many stay-at-home stocks that soared during lockdowns at the height of the coronavirus pandemic before tumbling as vaccines helped facilitate a return to normal life, the sell-off of Deliveroo shares has been brutal. 

On 15 March, the stock closed at 107.55p, down 66% from its all-time high of 396.80p, which it reached on 18 August 2021, and down 49% since the turn of the year. Since its IPO on 31 March 2021, the stock has fallen 63%.

What is likely to have left a bad taste in some investors’ mouths is the fact there are uncertainties over whether GTV growth and order volume can be maintained in 2022, as people return to offices and restaurants. 

As AJ Bell investment director Russ Mould explained in commentary published in January: “The effective lockdown conditions created by Omicron undoubtedly helped but with restrictions starting to be lifted, this supportive trend is rapidly moving into the rear-view mirror.”

“Already dealing with the pressures of an extremely competitive market, Deliveroo now faces the prospect of a cost-of-living squeeze which may weaken appetite for ordering takeaways on such a regular basis,” Mould added. 

Despite deals with Amazon [AMZN] and Morrisons, Deliveroo faces domestic competition from Just Eat [JET], whose share price has followed a similar pattern to Deliveroo’s in recent months. There’s also Uber [UBER] Eats as well as a number of smaller, startup players not listed on the stock market. 

Increasing competition has meant that Deliveroo has had to spend heavily on advertising to attract new customers and retain existing ones – “brand-building to drive awareness of the category and Deliveroo’s offering,” as the company put it. The interim trading results showed that while gross profit for the first six months of fiscal 2021 was up 75% year-on-year to £263.9m, marketing and overheads soared 61% to £290.9m, wiping out sales growth.

Will earnings give a taste of growth to come? 

With rising costs a key concern, investors will be looking to see whether the full-year results reflect a continuation of heavy advertising spending, now that the tailwinds of the pandemic are subsiding. They’ll also likely want to find out if ad spend in the first half of the year has translated into new customers and organic growth. 

While there are near-term uncertainties ahead, Barclays analysts like the stock enough to give the Deliveroo share price a target of 165p, according to a note seen by Proactive Investors. This implies an upside of 53% from its 15 March closing price.

“We like many parts of the Deliveroo story: grocery positioning, Plus subscription, London market share, sustainability of post-pandemic growth, incentivised founder-led team and the broader customer proposition,” wrote the analysts. 

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