EU Mandates And Rising Compliance Costs Will Erode Margins

Key Takeaways

• Regulatory, legal, and environmental pressures are expected to structurally increase operating costs and threaten Delivery Hero's long-term margin stability.
  
• Shifting consumer preferences and intense competition may weaken demand growth and undermine the company's path to sustainable profitability.
  
• Deep localization, platform integration, and multi-vertical expansion are driving operational gains, customer engagement, and profitability, positioning Delivery Hero for greater resilience and sustained growth.

Catalysts

Offers online food ordering and delivery services.

• Regulatory and legal risks are set to weigh heavily on Delivery Hero's long-term profitability, as mounting government requirements to shift gig workers to employment models and large legal settlements, such as the €450 million Spain liability and the pending EU antitrust payment, will cause a structural increase in operating costs, depress net margins, and divert cash flow for years to come.
  
• Ongoing shifts in consumer behavior, with a growing emphasis on home cooking and healthy eating, are expected to gradually erode demand for convenience-based food delivery platforms across core markets, potentially leading to stagnating or declining transaction volumes and limiting revenue growth over the long term.
  
• Delivery Hero's continued dependence on aggressive expansion into own delivery in key regions like Korea and Turkey, along with heavy investment and promotional expenses required to compete, risks long-term margin pressure and undermines the company's ability to achieve sustainable profitability, even as revenue growth is reported in the near term.
  
• The rise of competitive intensity in both global and local markets-fueled by well-capitalized rivals and industry consolidation-threatens Delivery Hero's ambitions for market share leadership, likely resulting in price wars, reduced take rates, and increasing pressure on both top-line growth and EBITDA.
  
• Expanding environmental regulations and public resistance to the ecological footprint of disposable packaging and rapid logistics will steadily drive up compliance costs and threaten the viability of fast-delivery business models, ultimately constraining Delivery Hero's long-term margin potential and exposing the company to persistent earnings volatility.

Delivery Hero Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Delivery Hero compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Delivery Hero's revenue will grow by 6.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -4.2% today to 1.9% in 3 years time.
• The bearish analysts expect earnings to reach €317.1 million (and earnings per share of €0.59) by about August 2028, up from €-560.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 26.8x on those 2028 earnings, up from -12.0x today. This future PE is greater than the current PE for the GB Hospitality industry at 23.3x.
• Analysts expect the number of shares outstanding to grow by 2.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.87%, as per the Simply Wall St company report.

Delivery Hero Future Earnings Per Share Growth

Risks

• Delivery Hero's unified global technology platform and deep localization strategy are driving significant operational improvements, as evidenced by a 9.5 percent reduction in cost per order and a 6.7 percent rise in conversion rates post integration, which can improve company net margins over time.
  
• The company's aggressive expansion into own delivery and multi-vertical offerings is generating higher customer engagement, with multi-vertical customers spending 5.2 times more than single-vertical customers, which could substantially boost long-term revenue and make the business more resilient to competitive pressures.
  
• Core segments such as Asia, MENA, Europe, and the Americas are experiencing double-digit GMV and revenue growth, with group revenue climbing 27 percent and adjusted EBITDA up 71 percent year on year in the first half, demonstrating strong topline momentum that bodes well for future earnings.
  
• Delivery Hero is showing consistent improvements in profitability, transitioning from negative to near-breakeven free cash flow (negative 8 million euro before extraordinary items), and achieving positive EBIT for the first time, which points to increasing financial sustainability.
  
• Strategic investments in logistics technology and operational efficiency, especially as seen in Korea and Turkey, are yielding faster delivery times and higher utilization rates, further reducing costs per order and supporting EBITDA margin expansion in the longer term.

Valuation

• The assumed bearish price target for Delivery Hero is €21.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Delivery Hero's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €52.0, and the most bearish reporting a price target of just €21.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €16.3 billion, earnings will come to €317.1 million, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of €22.68, the bearish analyst price target of €21.0 is 8.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.