Deliveroo shares halve amid reduced order growth forecasts

Deliveroo’s share price has tumbled sharply in 2022. As a result, the company recently adjusted its order outlook for the year amid rising inflation and customers tightening their purse strings. Survival strategies, including a BNPL (buy now, pay later) feature and a share buyback scheme, are designed to strengthen the balance sheet but analysts remain cautious.

Dodging Deliveroo’s [ROO.L] fast-moving, green-clad bike couriers has become a fact of life for many city dwellers. As the company prepares to release its Q3 results on 21 October, investors will be hoping its share price can be just as speedy in its recovery.

It’s been a difficult year for food delivery firms, with a marked slowdown in demand post-pandemic, as consumers are hit by higher inflation and energy bills. With the easement of Covid-19 restrictions, customers have also returned to eating out in physical restaurants, rather than ordering takeaways.

In July, the London-based company slashed its predictions for order growth in 2022. It said its gross transaction value (GTV) was anticipated to rise 4% to 12% for the full year, whereas previously a range of 15% to 25% had been forecast. 

The downbeat outlook has seen a year-to-date fall of 60.8% in the Deliveroo share price, with the stock closing at 82.04p on 17 October. Shares in the company have been on an inexorable slide since its disastrous IPO in March 2021, when the stock was valued at 390p but had tumbled by 31.3% within a month. Apart from a brief respite in August 2021, when it closed as high as 395p, it’s been on a sobering downward trajectory ever since.

H1 results beat estimates

In August, the food delivery platform announced its H1 2022 results. Deliveroo reported a pre-tax loss of £147.3m during the period, a jump up of 54.4% from the £95m loss during the same period in 2021.

In more positive news, the company’s revenue climbed by 11.7% year-on-year to £1.01bn, beating analyst’s estimates of £985m, according to a Bloomberg survey. At the time, Dannie Hewson, an analyst at AJ Bell, said: “It’s a pleasant surprise to see Deliveroo beat estimates, as it looked to be a prime candidate to serve up bad news.”

Overall, the company highlighted that total orders were up 10% and gross transaction volume was up 7% year-on-year. While these figures were a slowdown on the previous year’s growth, they mark surprising gains considering the dampened potential on post-lockdown-era sales.

Deliveroo also announced that it was exiting its Netherlands business; the company has also recently pulled out of Spain and German markets. It also initiated a stock buyback programme this year, in which it plans to buy up to £75m-worth of shares from investors by March 2023. It said the move had the “purpose of mitigating dilution from share-based compensation plans”.

Increasing options for customers

Deliveroo’s CEO Will Shu said in the summer that the company was confident that it could “adapt financially to any further changes in the macroeconomic environment”. It has reportedly cut back on its marketing spend in a bid to reduce losses.

The company recently launched a buy now, pay later (BNPL) option via a Klarna service for its takeaway deliveries, as it tries to head off any loss from customers feeling too tightly stretched to treat themselves — meaning a Friday night pizza or curry can be paid off in instalments.

Some financial pundits have been critical of the move, including consumer champion Martin Lewis, who says that borrowing should only be done out of necessity — not on a whim for takeout. While Klarna doesn’t charge interest on instalments, it reserves the right to pass overdue payments onto debt collectors. While the average Deliveroo order costs £22, this number could easily add up for families in a pinch.

Analysts mixed despite diversification plans

Deliveroo is also diversifying. This month, it opened its first brick-and-mortar store, on London’s New Oxford Street, partnering with supermarket giant Morrisons to help customers get their grocery shopping quickly. Its delivery service already has a partnership with Waitrose and Sainsbury’s [SBRY.L] to deliver customers’ grocery orders.

The questions is whether these moves are enough to rescue the floundering Deliveroo share price. In August, Citigroup analysts downgraded the stock to a neutral rating, saying it had “limited upside potential”, according to Proactive Investors. However, the firm left its price target of 110p unchanged.

Of the 15 analysts providing ratings to the Financial Times, two call the stock a ‘buy’ while four say it will ‘outperform’ and nine rate the stock a ‘hold’. The median 12-month price target of 125p would see the 17 October closing share price rising by 63.8%. The low target of 81p would be a 6.1% upside from its last close, while the high target of 265p would see the share price rising by 247.2% in the next year.