Downgraded sales forecast expected to drag down Deliveroo shares

After a poor performance since being floated last year, investors will be hoping Deliveroo can return to its coronavirus pandemic form. But with a downgraded outlook for 2022 as a result of inflationary pressures, the online delivery company may struggle to reverse its downward trajectory.

After releasing a disappointing earnings report last month, investors will be searching for positive signs in Deliveroo’s [ROO.L] interim half-year results, which are expected to be announced on 10 August.

The restaurant delivery business surged during the Covid-19 pandemic as strict stay-at-home guidelines caused demand to spike. The stock was floated last April and, with this rise in business, its share price climbed to near-400p highs.

However, since then, Deliveroo has lagged. A Covid-19 hangover has seen investors turn their back on the business, as a return to normal life has led to a fall in the need for Deliveroo’s services.

The stock has been one of the worst performers in the past 12 months, falling 71.7% (through 5 August). Year-to-date, it has lost 56.1% of its value amid prevailing macroeconomic uncertainty, closing at 92.16p on 5 August.

Deliveroo pulls back on 2022 guidance

On 18 July, Deliveroo issued its second-quarter trading update. For the period, the group’s gross transaction value (GTV) grew 4% year-over-year on a constant currency basis in the UK and Ireland, while more widely for the group it rose a more modest 2%.

This represented a slowdown in growth compared with the first quarter. But, despite this, the company still posted a 7% year-over-year increase in GTV for the first six months of 2022.

While the business reaffirmed its full-year adjusted EBITDA margin guidance of between -1.5% and -1.8% as a percentage of GTV, it reduced its full-year GTV growth from a strong 15–25% closer to the 4–12% range. Citing this down to “a more cautious economic outlook”, the business reassured shareholders that its balance sheet “remains strong” and that “management is confident in the Company’s ability to adapt financially to rapidly changing macroeconomic environment”.

Racing inflation may see consumers hold back

The business offered a small insight into its half-year performance in the July update. However, looking forward, spectators will be focusing on how more widely the business has managed to navigate itself through the first half of a tough year.

The most obvious threat to Deliveroo is the cost of living crisis. With the company surprisingly managing to grow total orders in the first six months of the year, as inflation continues to impact household spending, Deliveroo could see this good form come to an end. After raising interest rates last week, the Bank of England has made the bold prediction of low-teen inflation as we head into the tail end of the year. Should this be the case, we could see consumers further tighten their belts in the months ahead.

Even if Deliveroo can weather this difficult period, it also faces massive challenges with turning a profit. Its improved EBITDA margins may provide investors with some hope. Yet despite order numbers rising 73% across 2021 to 301 million, its pre-tax losses still came in at £298.2m. Investors will be hoping the business provides a positive update on how it’s planning to edge closer to turning a profit. Yet, improving profitability given current economic conditions may prove a tough test.

One way the business is attempting to do this is through expanding its partnerships. For example, last week it announced a new grocery delivery collaboration with Asda, which will be launched this month in 15 stores in the north of England, with plans for this to expand to 300 by the end of the year.

A consensus ‘hold’ from analysts

Despite its poor performance on the London Stock Exchange, analysts on average predict a slight uprise for the stock ahead of Wednesday’s interim update.

According to MarketBeat, five analysts offering price targets have a consensus price of 135.8p, representing a 47.4% upside on the 5 August closing price. The majority place a ‘hold’ rating on the stock.

16 analysts offering 12-month price targets for Deliveroo, according to the Financial Times, have a median target of 142.5p. The recommendations are mixed, with six deeming the stock ‘hold,’ while a further six recommend the stock as ‘outperform’.