After shocking investors with one of the worst IPOs in the history of the London Stock Exchange, the Deliveroo (LSE: ROO) share price is now back in favour with the market. It recently recovered its IPO losses, and even surpassed its initial offering price.
However, I think the real challenge for the stock will come in 2022. At could turn into a make-or-break year for the enterprise.
A make-or-break year for the Deliveroo share price
Whenever I’ve covered the company in the past, I’ve always tried to point out that the group experienced windfall sales growth last year. But that may not last. Stuck-at-home-consumers had no choice but to order from delivery platforms. There was never a guarantee this would continue.
However, initial indications show that consumers have continued to use meal delivery platforms like Deliveroo as the economy’s reopened. And these figures have buoyed the share price.
Nonetheless, I reckon the big challenge will come next year. So far, the company’s sales have continued to grow, but it’ll be fighting against very strong historical sales figures next year.
For the second quarter of 2021, Deliveroo reported a 76% increase in transactional volumes on its platform. For the full year, management is forecasting growth of between 50% and 60%.
After two years of explosive growth (2020 and 2021), I think it’s unlikely the company will be able to repeat this performance in 2022. It may face other challenges as well.
Wages are rising in the hospitality sector, and Deliveroo might not be able to retain enough workers if it can’t match pay elsewhere.
And then there’s the challenge of working against the backdrop of the reopened economy. When all of the company’s fees are included, a Deliveroo meal is already significantly more expensive than ordering from a restaurant directly. If it has to increase costs to compensate for higher wages, consumers may seek out other options.
Still, despite these challenges, the Deliveroo share price has some tailwinds working in its favour. The pandemic really opened up the meal delivery sector to a lot of consumers. And the potential for repeat business is tremendous.
Deliveroo has also recently inked several agreements with other firms to deliver groceries and other goods. This gives it an albeit slender advantage over competitors.
Overall, I think the Deliveroo share price will hit some turbulence in 2022. However, I don’t think these issues will cause the value of the company to drop significantly. But nor do I believe it’ll repeat the performance of the past few weeks.
Despite this mixed outlook, I’d buy a speculative position in the corporation for my portfolio as a long-term investment. As the company continues to develop and grow its offer, I believe it has substantial long-run potential.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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