As the Deliveroo share price surges should I buy the stock?

A Deliveroo rider cycles in London

Since its disastrous IPO in April, the Deliveroo (LSE: ROO) share price has staged a strong recovery. The stock has increased in value by nearly 15%. By comparison, over the past six months, the FTSE All-Share Index has risen almost 10%. 

I think this performance signifies that the market is beginning to reconsider the company’s outlook. And I think it’s easy to understand why investors may be re-evaluating the firm’s potential. 

One of the factors I’ve been keeping an eye on is Deliveroo’s growth. Last year, the number of users for the meal delivery platform jumped as lockdowns forced consumers to stay at home. This provided the group with a windfall, but it wasn’t clear if this growth would last. 

Not a one-off 

Initial indications appear to show that customers are sticking with the platform. According to the group’s trading update, orders grew 88% year-on-year to 78m in the second quarter of 2021.

Orders in the UK and Ireland grew 94% year-on-year. What’s particularly notable about these figures is that the country was coming out of lockdown during the second quarter. Therefore, it seems as if consumers have continued to use the platform, even though the economy’s opened up. 

I think this bodes well for future growth. While there’s still a risk that orders could drop off in the third and fourth quarters as the economy slowly returns to some form of normal, the fact that consumers haven’t rushed to leave the platform is a positive indication. 

In my opinion, this growth has been the driver behind the recent performance of the Deliveroo share price. 

The last time I covered the meal delivery company, I said my opinion of the group had changed as it looked as if last year’s growth wasn’t a one-off. I still hold this view. However, when it comes to valuing the business, it becomes a bit challenging. 

With the company forecast to report losses for the next few years, it’s challenging to value the business on an earnings basis. An alternative metric is sales. On this basis, the Deliveroo share price is trading at a price-to-sales (P/S) ratio of 5.2. By comparison, peer Just Eat is selling at a P/S ratio of 5.5. 

These numbers imply the stock’s slightly undervalued, but not by much. 

Can the share price continue to rise? 

Based on all of the above, I’m not a buyer of the stock at current levels. Even though I’m encouraged by its recent progress, I think Deliveroo now looks expensive compared to its peers.

Therefore, I think the business may struggle to achieve a higher valuation, especially considering the competitive nature of the meal delivery market. It’ll have to overcome some significant challenges to remain competitive, with the likes of Just Eat spending hundreds of millions of pounds every quarter to achieve customer growth.

The post As the Deliveroo share price surges should I buy the stock? appeared first on The Motley Fool UK.

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More reading

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  • The Deliveroo share price is climbing. How much further will it go?
  • Deliveroo share price: I’m still down, but here’s the good news

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Just Eat N.V. 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.