Food delivery in the European stock market is making a comeback. Food delivery stocks such as Delivery Hero SE (ETR: DHER) and Just Eat Takeaway.com NV (LON: JET) appear to be the highest gainers in Stoxx Europe 600 Index in Q2 as companies. Expectations have been buoyed by the surge in the belief that central banks will not excessively raise interest rates to curb inflation.
Since June 30th, Just Eat has increased by 53%, and Delivery Hero has increased by 46%, a surprising reversal after both companies were among the top 10 decliners in the first half. The share price of Deliveroo plc (LON: ROO) has increased by 15% from its yearly low. Exactly what investors have been requesting for a long time, the big uptick occurred after the companies prioritized lowering losses and demonstrating a path to profit while repairing their balance sheets. Stock in Just Eat jumped on Friday after the company announced plans to sell its portion of a Latin American joint venture.
Portfolio manager at Columbia Threadneedle Investments, who owns shares of Delivery Hero and Just Eat, Philip Webster, said that now he is much more comfortable in that path of cash and not keen on a balance sheet risk. Not only have the financial statements strengthened, but the situation overall is much brighter. Improved profit projections can be attributed to rising service fees and decreasing marketing costs. As a result, the loss projections for this year for Delivery Hero have shrunk, while those for the other two have remained the same.
HSBC Analyst Andrew Porteous said the market was looking for more rationality around profits in the second quarter. The messaging around profits has been even stronger than he was expecting. It is important to note that this slower expansion is a trade-off for this new approach. The sector risks losing clients tight on cash due to price rises. In the second quarter, the transaction value on Just Eat’s platform fell short of analyst estimates, and both Delivery Hero and Deliveroo decreased their growth targets for 2022.
Some investors have seen past lower growth expectations thanks to a renewed focus on profits. According to Philip Webster, these meal delivery services have had “unbelievable compounding growth,” but their capacity to turn a profit is still largely unproven.
According to Citigroup Analyst Monique Pollard, competition agrees on easing the food delivery stocks despite Deliveroo exiting the Netherlands and Just Eat closing its operations in Romania and laying 100+ employees in France. He recommends buying Just Eat and Delivery Hero shares and downgraded Deliveroo to neutral last week.
Andrew Porteous warned that the recession would test the food delivery stocks because of the market’s overly optimistic projections for the companies’ growth rates. As a result, investors still have “very wide” uncertainty about the ultimate fate of these companies. He clarifies that while there is growth in the market, he would watch out for the next couple of quarters from key consumer perspectives.
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