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Trading for pennies, can the Deliveroo share price recover?

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It is a common sight on city streets to see a Deliveroo (LSE: ROO) driver whizzing by. The Deliveroo share price has also been whizzing along — but not in the direction most shareholders would hope for. Over the past year, the shares have tumbled by 74%.

The shares now trade for pennies. At that level, they may look cheap. After all, Deliveroo has recorded regular revenue growth and benefits from a strong brand in a consolidating market. But is the Deliveroo share price really a bargain?

Business model problems

Even after its fall, I think the answer is no.

The problem I see with Deliveroo is not the company itself, which I regard as one of the leaders in its marketplace. Rather, the question I have from an investment perspective is whether the marketplace itself makes sense.

It is easy to see why there could be strong future demand for food delivery. But what I find harder to fathom is how that desire can be met profitably. Logistics firms like Royal Mail deal with massive volumes on regular routes. Companies that make a lot of one-off deliveries like FedEx tend to be transporting items with enough value that a delivery charge can be imposed without hurting demand.

But is that true for a sandwich or a lasagne dinner for one? These items are not expensive, so the added cost of delivering them can mean the bill goes up a lot proportionately. Customers may not want to pay that — but restaurants are in business to make a profit so might also not care to pick up the bill.

That cuts to the heart of the issue I see with Deliveroo: it has not cracked the challenge of how to make delivery profitable. If it sticks with its current business model, I am not confident it ever will.

Deliveroo share price woes

For the Deliveroo share price to recover, I think the company needs to reassure the market that it has found a model that could well be profitable, even if it is not yet.

So far that has not happened. In its interim results last month, the company spoke of “challenging market conditions”. It recorded a loss before income tax of £147m, an increase of 54% on the same period last year.

That heightened loss was despite revenue increasing by 12% compared to the same period last year. Again I think this shows the weakness in Deliveroo’s current business model. Growing revenues ordinarily ought to help a healthy business reduce losses. At Deliveroo, as revenues are growing, so are losses.

I do not think this problem is impossible to fix. Food delivery is here to stay in one form or another and Deliveroo has a large customer base. In the first half, for example, it handled 160m orders. So I think the company could adapt its business model and find a path to profitability. If it does that, I see an opportunity for the Deliveroo share price to recover.

My move

For now, though, the company continues to rack up losses. I think that could go on for the foreseeable future. That could mean that the already battered Deliveroo share price continues to drift downwards.

Until the company has proven that its business model can be profitable, I will not be investing in it.

The post Trading for pennies, can the Deliveroo share price recover? appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Deliveroo Holdings Plc. 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.