After the company’s disastrous IPO earlier this year, the Deliveroo (LSE: ROO) share price has staged a strong recovery. In the past month alone, the stock has added 15%.
The company’s fundamental performance has boosted the shares. A month ago, the group informed the market that orders on its platform doubled during the first half of 2021, defying expectations.
At the same time, it narrowed its pre-tax losses to £104.8m, as against £128.4m a year earlier. The company also told the market its gross transaction value for the first six months of the year was £3.4bn, an increase of 99% for the same period in 2020.
Unfortunately, it seems as if management also thinks the group’s growth will moderate in the second half. Even considering the company’s performance in the first half, management’s still forecasting gross transaction growth of 50-60% for the whole year.
Deliveroo share price outperformance
Considering Deliveroo’s performance in the first half, I think it’s possible the business could outperform in the second half. If it does, the company may beat management’s growth targets for the year.
And if the company continues to outperform, I think it’s likely the Deliveroo share price will continue to head higher. However, it’s impossible to predict the future performance of any stock price. There’s no telling how the market will react to further updates. Nor is there any guarantee the company will outperform in the second half. That’s just speculation on my part.
Still, I’m encouraged by the fact consumers are still using the group’s platforms. I did believe that as the economy reopened, consumers would return to restaurants and avoid meal delivery platforms. It seems that hasn’t happened.
Moreover, Devlieroo is expanding its services. The health & beauty chain Boots is the latest business to make its products available on the platform. It is starting with a small trial of 400 products, including items such as make-up, skincare, painkillers and hay fever tablets.
The group has prioritised partnerships over the past few years. It also has collaborations with Waitrose, the Co-op, Morrisons, Sainsbury’s and Aldi. Grocery deliveries accounted for 7% of transaction volumes in the first half. As the company expands its partnerships, I think this figure will grow.
Having said all of the above, the meal and grocery delivery markets are incredibly competitive. The firm is still spending huge sums on marketing. Until it can generate a sustainable profit, I think the market will remain sceptical about the Deliveroo share price prospects.
Other challenges the business may face include the need to pay workers more, which will increase costs. This will only weigh on the company’s efforts to earn a profit.
Even after taking these risks and challenges into account, I think the outlook for the Deliveroo share price is improving. As such, I’d buy a speculative position in the business for my portfolio as I believe there’s a growing chance the firm will outperform in the second half.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons. 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.
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