Deliveroo share price rises as it sharpens focus on profitable growth

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Josh Warner
By :  ,  Market Analyst

Deliveroo revenue hits £1 billion for the first time

Deliveroo beat expectations this morning after delivering over £1 billion in first half revenue for the first time on record. This was up 12% from last year thanks to greater commission from restaurants, higher fees charged to consumers, and an increased contribution from its new advertising business after it launched a new platform to promote fast-moving-consumer-goods earlier this year. That beat the 6.8% rise forecast by analysts.

Its gross margin improved to 8.5% from 7.8% last year it pushed up commissions and fees, resulting in a 16% rise in gross profit to £300.9 million. However, this was more than swallowed up by the £368.8 million in marketing and overhead costs in the period, resulting in an adjusted Ebitda loss of £68 million. Still, this was also better than the £73.3 million pencilled-in by analysts.

 

Deliveroo sees demand drop in Q2

Demand softened in the second quarter compared to the first as consumers became more cost-conscious in the inflationary environment, although Deliveroo said it has continued to gain market share in core markets like the UK, France and Italy.

Gross Transaction Value (GTV), representing the value of all the orders received from customers, grew just 2% in the second quarter compared to 12% in the first. However, Deliveroo CEO Will Shu said recent GTV growth rates are ‘certainly above’ what we saw in the second quarter, although this is largely down to easier comparisons. This will keep investors wary of what to expect in the second half as rising bills force consumers to tighten their purse strings.

 

Deliveroo reiterates full year outlook

Deliveroo reiterated its full year ambitions that were revised earlier this year. GTV should grow 4% to 12% in 2022, having already been previously cut from its original goal of 15% to 25%. The wide range provides scope for this to be tightened later this year once visibility improves, with the inflationary environment and a change in consumer habits making things more difficult to predict.

‘Management expectations for 2022 reflect current uncertainties, particularly across European markets, due to inflationary pressures, post-COVID consumer behaviour, and the broader geopolitical and economic impacts of the conflict in Ukraine,’ Deliveroo said.

Current consensus figures believe the second half will be much better than the first, with analysts forecasting a 16% rise in both GTV and revenue and an improved adjusted Ebitda loss that is expected to be less than half what was booked the year before.

 

Deliveroo to exit the Netherlands

Deliveroo said it is planning to exit the Netherlands as it becomes more stringent with expenditure. It only generated around 1% of GTV in the country during the first half. It plans to pull out by November as it cannot justify the amount that would need to be spent to bolster its tiny market position. It made a similar exit from Spain late last year.

This is significant as Deliveroo is focused on getting the business profitable at the adjusted Ebitda level over the coming years. With that in mind, its core operations in the UK and Ireland are already delivering positive adjusted Ebitda, but this is being more than swallowed up its international offerings, increased costs and higher investment.

 

When will Deliveroo become profitable?

Deliveroo said in March that it is aiming to become profitable at the adjusted Ebitda level sometime between June 2023 and June 2024 and is getting a grip on expenditure and costs as a result.

‘Deliveroo is committed to delivering profitable growth. We are focused on driving the business to the milestone of adjusted EBITDA profitability and then on to positive free cash flow generation. In March we set out our path to profitability and the levers to deliver this. So far in 2022, we have made good progress delivering on our profitability plan, despite increased consumer headwinds and slowing growth during the period,’ the company said this morning.

‘Underpinning our progress is a rigorous approach to capital allocation, ensuring that we invest behind the opportunities with the highest returns,’ it said.

While the tough macroeconomic conditions will plague the outlook for demand going forward, Deliveroo’s focus on profitable growth is paying off and installing confidence that it can achieve its goal on schedule.

Its operations burnt through over £128 million in the first half, marking a small improvement from the year before. That level of cash burn is more than manageable for Deliveroo considering it had over £1.1 billion in cash at the end of June and no debt on the balance sheet.

 

Deliveroo launches £75 million share buyback

Deliveroo launched a £75 million share repurchase programme this morning that will run until the end of March 2023. This will help counter the dilutive effects of its stock compensation plans for employees.

 

Where next for the ROO share price?

Deliveroo has had a tough time since it went public at 390p per share in March 2021. The stock only briefly managed to surpass this price last year and has plunged over 75% from its peak to all-time lows earlier this year.

The stock hit a low of 80p in May and this has emerged as a firm floor for the stock. This has been tested no less than nine times in recent months to cement this as a key level of support.

However, Deliveroo shares have also been capped by a ceiling of 101p during the past three months and remains in consolidation mode. The stock is likely to continue to drift between this 80p to 101p range until a catalyst can provide the fuel for a breakout after today’s results failed to provide the necessary spark.

A break above 101p would open the door to 113p and then the March-high at around 129p. From there, the 143p level of support-turned resistance seen back in February comes back into view. Notably, the 17 brokers that cover Deliveroo believe the selloff this year has been overdone and that there is even greater upside potential with an average target price of 151.4p, implying there is over 64% potential upside from the current share price.

The Deliveroo share price is in consolidation mode between 80p to 101p

 

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