Deliveroo shares: a FTSE investment for explosive growth

Share in the delivery giant Deliveroo (LSE: ROO) has started the year on the front foot. The stock price may only be up 5%, but there may be plenty of room for growth, according to that Jefferies, which has a price target of £1.55. Given the 65% rise, I can buy growth stocks after a positive Q4 update.

Delivering value even when times are tough

With food inflation at 18%, many investors expected Deliveroo to post poor numbers for 2022, but the opposite happened. Inflation benefited food delivery companies, with Q4 and full-year figures beating analysts’ estimates.

Although the total number of orders and monthly active customers saw a decline, this was offset by the impact of higher prices of items, as more affluent Deliveroo customers showed their willingness to spend. This drives more important metrics (GTV and GTV per order).

Consequently, the FTSE stalwart exceeded its original outlook, ending the year with a margin of -1% on an EBITDA basis. This is due to the strong performance of H2 which made the company achieve EBITDA breakeven. As a result, management predicts to be profitable EBITDA in 2023.

Take the right route

How did it happen? Well, Deliveroo has taken all the right steps to improve its bottom line. The first to come out of Australia and the Netherlands. While it initially hurt investor sentiment, it proved to be the right call given the poor market share and operating landscape in the region. In fact, the current exit will provide at least a £20m tailwind to the group’s profits.

Deliveroo has instead decided to pool its resources to enter and expand its base in more affluent markets such as Qatar, Hong Kong, and the UAE, where it appears to be more successful. Couple this with the increase in restaurants (+8k), grocery stores (+2k), and motorist satisfaction (+3%) over the past quarter, and I can see a promising investment case.

In addition, the council will continue to optimize the way of growth in advertising while improving the cost structure this year. And as mentioned, CFO David Hancock even said that Deliveroo could achieve EBITDA profit with flat GTV growth this year.

Ride up

However, this does not eliminate significant short-term inflationary pressures and cost-of-living crises. But that shouldn’t discount the unicorn’s long-term potential. The food delivery industry is still young as penetration remains low with addressable markets in many countries. This is especially the case in an increasingly digitized society.

And even happy Barclays and JP Morgan Deliveroo’s rate shows ‘hold’ with an average price target of £0.96, I’m more inclined to side with Jefferies and Berenberg who have ‘buy’ ratings on the stock with an average price target of £1.45.

Given Deliveroo’s strong balance sheet, reduced cash burn, and near-term profitability, I am confident in CEO Will Shu’s ability to steer the service to positive free cash flow.

Also, after looking at the valuation, I think the current share price is reasonable. I believe the downside risk is sufficiently priced in with the lack of long-term upside potential that is considered. Therefore, I will start a small position in Deliveroo shares soon.