Deliveroo shares trade lower after first half results

Deliveroo (ROO) shares were trading lower in early London price action after the company released the results for the first half of the year. While the company had a dismal listing it has looked strong over the last few weeks.

Deliveroo priced the IPO at 390p which was at the lower end of the range and the company blamed “volatile global market conditions for IPOs.” Despite pricing the IPO at the lower end of the range, the stock tumbled 30% on the listing day. While the IPO was supposed to be a test of London’s appetite for tech shares amid a red-hot IPO market for tech stocks in the US, it turned out to be a lacklustre event. However, the shares have gained almost 19% over the last month and are getting near the IPO price.

Deliveroo first half 2021 results

Deliveroo reported GTV (gross transaction value) of £3.38 billion during the first half of 2021 which was more than double what it did in the corresponding period in 2020. The GTV increased 131% in the first quarter and 81% in the second quarter. The company reported revenues of £922.5 million in the first half which was 82% higher than the corresponding period in 2020. The company attributed higher revenues to the increase in GTV.

The company’s gross profit increased 75% to £263.9 million in the first half. However, the gross margin as a percentage of GTV fell by 100 basis points to 7.8%. Deliveroo attributed the contraction in gross margins to “accelerated investments to support future growth, including consumer acquisition and retention, and differentiated restaurant and grocery selection.”

EBITDA loss narrows

Deliveroo’s adjusted EBITDA loss narrowed to £27 million during the period as compared to £30.3 million in the corresponding period in 2020. The company ended the first half with cash and cash equivalents of £1.63 billion which includes the over £1 billion net proceeds that it received from the IPO.

“We are seeing strong growth and engagement across our marketplace as lockdowns continue to ease. Demand has been high amongst consumers. We have widened our consumer base, seen people continuing to order frequently and we now work with more food merchants than any other platform in the UK,” said Deliveroo founder and CEO Will Shu.

Deliveroo maintains guidance

Deliveroo also maintained the 2021 guidance that it had provided earlier this year. The company expects GTV to increase between 50-60% this year. It expects the gross margins as a percentage of GTV to be at the lower end of its range of 7.5-8% due to increased investments.

“As reflected in our guidance, whilst we expect that consumer behaviour may moderate later in the year, we remain excited about the opportunity ahead and our ability to capitalise on it,” said Shu.

Driver satisfaction

There have been concerns over rider satisfaction and many of the riders protested around the IPO time citing low earnings. In its update, Deliveroo said that 85% of the riders globally are satisfied or very satisfied. The company also saw good driver retention rates despite a booming job market which has led to higher vacancies.

Many institutional investors, as well as activists, have been critical of Deliveroo over its policies towards contractors and avoided the IPO.  EdenTree described Deliveroo as “best characterised as a race to the bottom with employees in the main treated as disposable assets – which is the very antithesis of a sustainable business model”.

Deliveroo has most food merchants on the platform in the UK and had a 72% population coverage at the end of June which was much ahead of its guidance of reaching 67% coverage by the end of the year.

Deliveroo recent developments

Recently Deliveroo hired Devesh Mishra as its chief product and technology officer. Mishra was previously with Amazon which eventually is among the investors of Deliveroo. “He has unique and unmatched experience in how technology can help to scale a business and deliver world-leading consumer experiences,” said Shu while announcing the news. The shares had spiked after the announcement.

Recently, Deliveroo’s rival Delivery Hero announced a £300 million stake in Deliveroo. The two companies compete against each other in several markets including Singapore and Hong Kong. ROO shares had spiked after the announcement as Delivery Hero CEO Niklas Oestberg called the shares “undervalued.”

The news ignited rumours that ROO might be an acquisition target. However, the company’s dual share structure which gives higher voting power to Shu could be a dampener in any acquisition.

Jefferies analyst Giles Thorne sees the partnership between ROO and Delivery Hero as an opportunity in the grocery delivery industry. “Convenience grocery is the next big category ready to migrate from offline to online. Both companies are first movers on a model that works. And so there is a strong strategic alignment there,” said Thorne in his note.

Food delivery market

The food delivery market is growing fast. While the high growth rates that companies like Deliveroo saw at the height of the pandemic might not be sustainable, the industry is set to grow at a high pace in the near foreseeable future. There has been a flurry of listings of food delivery companies. India-based food delivery company recently listed in a blockbuster IPO. Grab is also going public through a SPAC merger.

Deliveroo shares were trading 2.4% lower at 9 AM London time today.