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Deliveroo (LSE:ROO), one of the most famous food delivery companies, has seen rapid price growth in recent years. In my opinion, it is one of the most interesting companies in the sector. FTSE 250 Indexand there is likely to be much more room for its development.
With a solid international expansion plan in place and smart operational strategies, Deliveroo is undoubtedly one of the best investments you could consider.
Lots of potential for future growth
The company currently operates in 12 countries and I am impressed by its agile international strategy. It has entered and exited several markets to optimize results. For example, it exited Germany, Taiwan, Spain, Australia and the Netherlands, while launching in new markets such as Kuwait and Qatar.
In addition, to support its growth, Deliveroo is expanding its grocery delivery service, which has already demonstrated good performance in the UK and the UAE.
It is also expanding into non-food retail, such as toys and electronics. In addition, Deliveroo Hop, its fast grocery delivery service with faster delivery times and a wider selection of grocery products, could attract more customers.
stocks are not cheap
While the company has a favorable position in the international market, the stock is definitely not cheap. With a price-to-sales (P/S) ratio of 1.21, which is much higher than the industry median of 0.64, this is certainly a risk.
However, the market has valued the investment at a very high price for a reason: it has generated very solid revenue growth over the past five years, averaging 34%.
In my opinion, these stocks are not too expensive to invest in. However, I am not considering them as a great investment in my portfolio if I invest, because there is still a higher risk of volatility due to the price/sales ratio.
Its margins could come under pressure
Deliveroo has significant competitors, including Uber Eat and Just eatand has a reduction in direct-to-consumer delivery market share, such as Domino provides.
The food delivery sector also has low margins, driven by high labor and operating costs. The company currently has a net margin of just 2.6%. It therefore also has less free cash flow. This means that it can develop less financial security than one might wish from an investment.
Given the competition, it is fair to think that Deliveroo could face price pressure in the future. This is also very true at a time when automated delivery could become mainstream. If management does not introduce the right technological innovations, other delivery providers that do so successfully could offer lower prices.
However, this business is still in its early stages and I expect its net margin to expand. It only reported positive free cash flow and earnings for the first time in 2024.
I'm waiting for a better evaluation
Deliveroo is a service I use often and is an investment that I believe has a lot of room to grow in value over the long term.
I am definitely bullish on this stock. However, since the valuation is quite high, I have decided not to invest for now. Instead, I will see if it becomes cheaper in the future, then I will buy my share.
