Can Deliveroo Meet Improved Guidance?

Food delivery firms in the UK have maintained an optimistic outlook despite the cost-of-living crisis that has pressured grocers and restaurants alike.

Doing Better and Better

When Deliveroo last reported, it provided two fruitful announcements to investors: the EBITDA outlook was substantially increased to £60-80M from £20-50M previously, and proposed to return an additional £250M to shareholders. But, the company didn't report a profit, once again. The consensus among analysts is that Deliveroo won't turn a profit until 2025, even assuming a relatively generous growth rate of 71% in sales. However, it has managed to cut its loss by 46% over the last year.

Needless to say, investors will likely focus on expectations for the company to reach profitability. On the positive side, it is reducing free cash outflow faster than its profit, partly thanks to growing its gross margin to gross transaction volume (GTV) ratio more quickly than its revenue. But on the risky side is that total orders have been declining. This mirrors a phenomenon in the broader economy where the higher-end market has remained more resilient in the face of high inflation. Deliveroo, in other words, is making more money from fewer customers, not the typical dynamic of an expected high-growth tech firm.

What Could Be in the Trading Update

While Deliveroo has been focusing on cost-cutting as it faces the challenging post-pandemic environment, management is facing another front: The change in voting power of its founder, who currently has a controlling interest thanks to the shareholding structure. But, that structure will change next April, bringing in the possibility that more shareholders could have a larger input on managing the company. The change has brought interest from additional investors, such as Sachem Head, which took a stake in the company, taking advantage of the stock price dropping 70% since its IPO.

According to a consensus of analysts collected by the company, the company will see its GTV grow in the third quarter by 3% to £1.69B, driven almost entirely by the size of the order. Revenues are expected to increase by a mere 1% from the prior year. However, the focus seems to be on the company's ability to turn a profit, so potential cost-cutting measures and investor incentives might interest investors more.

Flag Pattern Appears Complete

In the long term, Deliveroo appears far from generational lows, and above triple digits, it remains somewhat upbeat for investors. The more recent rejection at 110 might have formed regional support pending upsides, but under 130 and the 2023 peak of 133, it may turn out to be a correction, be it a triangle, pennant or an incomplete flag. The pattern resembles a completed flag, with the measured-move projection pointing to the projection high of 147.

Source: SpreadEx / Deliveroo

Key Takeaways

Deliveroo reported an increased EBITDA outlook and plans to return £250M to shareholders during its last earnings. However, it still hasn't reported a profit and analysts predict it won't do so until 2025. Despite this, it has reduced its loss by 46% over the past year. Investors are concerned about the company's profitability and ability to attract more customers as total orders have declined. Additionally, the company faces challenges with its shareholding structure and potential management changes. While GTV and revenues are expected to grow slightly, investors are more interested in cost-cutting measures and incentives the company may announce.