Deliveroo Share Price Up 15% – Time To Buy Deliveroo Shares?

The price of Deliveroo stock has surged 15% since 24 June while trading 2.2% higher this morning at 290.4 per share, this being the fourth consecutive up day for ROO.

A favorable ruling that came out last Thursday has been responsible for this latest uptick in the stock price after an appeals court dismissed claims from the Independent Workers’ Union of Great Britain (IWGB) labor union that sought to change the status of the delivery firm’s drivers so they are considered workers rather than self-employed individuals.

ROO shares reacted positively to the ruling as they moved more than 9% higher on the day of its publication while this latest jump is pushing the price above the IPO’s closing low of 287.5 per share.

This marks a major turn for the delivery company after its initial public offering (IPO) flip-flopped amid concerns from institutional investors regarding the company’s labor practices.

Is this a signal that Deliveroo shares are ready to move higher after weeks of disappointing performance? Let’s have a look at the firm’s fundamentals to see if the valuation remains appealing at these levels.

Deliveroo Shares – technical analysis

The chart above shows how the IPO lows have become an intraday resistance for Deliveroo stock this morning after this latest four-day surge. At the moment, the stock is trading 1.5% above its upper Bollinger band, which could result in a brief pause in the rally.

However, momentum indicators point to a significant change in the stock’s latest trend, which means that a pullback at the moment could present a buying opportunity based on the business overly depressed valuation metrics.

Perhaps the most interesting aspect that makes this stock quite appealing is the fact that cash at hand is accounting for almost 30% of the firm’s market capitalization, with the entire business being valued at roughly £3.6 billion even though it should be producing more than £5 billion in GTVs by the end of this year.

For comparison, the American delivery service DoorDash (DASH) is currently being valued at an eye-popping multiple of 13.6 times its forecasted revenues for 2021, which shows how undervalued Deliveroo could be.

The two companies are fairly similar in terms of historical revenue growth rates, profitability, and solvency, which means that market participants should eventually move to assign Deliveroo a higher multiple now that these employment status-related concerns are becoming an item in the rearview mirror.

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Deliveroo Shares – fundamental analysis

Deliveroo’s revenues have been growing steadily since 2015, with sales moving from £18.1 million back then to as much as £1.19 billion last year. Meanwhile, the pandemic allowed the firm to almost double its top-line results as consumers increasingly relied on its services during lockdowns.

According to the IPO prospectus, Deliveroo expects to see its gross transaction volumes (GTV) landing around 30% to 40% above the figures seen last year while growth should decelerate to a rate of around 20% to 25% per year moving forward. Last year, gross trading volumes surged to £4.08 billion, which means that Deliveroo expects GTVs of around £5.71 billion by the end of this year.

Meanwhile, gross profit margins for ROO have been going up as well, moving from 19% in 2018 to 30% last year. However, operating expenses continue to eat up most of the firm’s earnings, with the company reporting net losses of £226.4 million last year while accumulating more than £1 billion in losses since 2015.

By the end of the first quarter of 2021, Deliveroo had no long-term debt while the firm’s cash and equivalents stood at £1.5 billion.

With a market capitalization of approximately £5.15 billion at the moment, the company is being valued at roughly 0.6 times its 2021 estimated GTVs and 2 times its forecasted 2021 sales excluding cash.

This is a fairly conservative valuation and points to a temporary undervaluation in the stock amid concerns that UK courts could rule in favor of workers. For a company that is growing at a compounded annual growth rate of 131.2%, these multiples are overly depressed and the positive catalyst resulting from this favorable ruling could trigger the beginning of a strong bullish cycle for ROO.