Investments In Loyalty Programs And Geographic Expansion Will Increase Future User Engagement

Key Takeaways

• Enhanced Consumer Value Proposition and vertical integration strategies may drive user growth and revenue increase through improved engagement.
  
• Investments in logistics efficiency and loyalty programs could elevate operational margins and expand revenue streams beyond food delivery.
  
• Challenges in market presence, growth initiatives, and geopolitical factors risk impacting Deliveroo's revenue, profitability, and net margins amid competition and economic pressures.

Catalysts

A holding company, operates an online food delivery platform in the United Kingdom, Ireland, France, Italy, Belgium, Hong Kong, Singapore, the United Arab Emirates, Kuwait, and Qatar.

• Deliveroo's ongoing focus on enhancing its Consumer Value Proposition (CVP) and vertical integrations such as grocery and retail could lead to increased user growth and engagement, driving future revenue growth.
  
• The company is investing in initiatives like multi-pickup stacking and logistics efficiency, which are expected to improve delivery network efficiencies and thereby expand net margins.
  
• Deliveroo's advertising business, which scaled to represent 1.4% of GTV in Q4 2024, has potential to grow further, increasing revenue streams beyond core food delivery operations.
  
• Efforts to strengthen its loyalty programs, such as the Plus and Diamond tiers, have led to higher frequency of orders from paying subscribers, which could improve both revenue and net profit margins.
  
• With plans to accelerate geographic expansion and unlock new meal occasions, Deliveroo anticipates gaining market share and expanding its overall market, contributing to higher future revenue growth.

Deliveroo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Deliveroo's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.0% today to 6.3% in 3 years time.
• Analysts expect earnings to reach £159.2 million (and earnings per share of £0.1) by about April 2028, up from £-100.0 thousand today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £237.4 million in earnings, and the most bearish expecting £122.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.9x on those 2028 earnings, up from -18951.9x today. This future PE is greater than the current PE for the GB Hospitality industry at 17.8x.
• Analysts expect the number of shares outstanding to decline by 2.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.13%, as per the Simply Wall St company report.

Deliveroo Future Earnings Per Share Growth

Risks

• The exit from the Hong Kong market may indicate challenges in maintaining a competitive presence in regions with high price sensitivity or intense competition, potentially impacting future revenue and growth prospects.
  
• Continued investments in various growth initiatives, such as their loyalty program and expanding geographies, may delay profitability improvements, which could impact net margins and earnings.
  
• Dependency on grocery and retail verticals for growth could yield lower profit margins due to different unit economics compared to their restaurant delivery business, potentially affecting overall earnings.
  
• Macroeconomic factors like national living wage and national insurance increases in the UK may pressure consumer prices, potentially affecting demand and thus impacting revenues.
  
• Geopolitical uncertainties and competition from international players, such as Meituan's expansion efforts, could challenge Deliveroo's market share and affect profitability, ultimately impacting financial health.

Valuation

• The analysts have a consensus price target of £1.688 for Deliveroo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.45, and the most bearish reporting a price target of just £1.15.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £2.5 billion, earnings will come to £159.2 million, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 8.1%.
• Given the current share price of £1.29, the analyst price target of £1.69 is 23.4% higher.
• 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.