Why Deliveroo needs to deliver real profit and cash flow, not self-adjusted ones

AJ Bell press comment – 19 January 2023

“It was Warren Buffett’s longstanding business partner, Charlie Munger, who once stated, ‘I think that, everytime you see the word EBITDA, you should substitute the word ‘bull***t earnings.’ Heaven knows what he would make of Deliveroo’s fourth-quarter trading statement, which trumpets an improvement in adjusted EBITDA, but the answer is possibly less than the traders who shoved up the share price when the fourth-quarter update came out,” says AJ Bell Investment Director Russ Mould. “At least the statement shows improved momentum in Deliveroo’s preferred measure of profits, while signs of increased market share – possibly at the expense of Just Eat Takeaway – may also explain the share price gains, but no-one should be under any illusions. Deliveroo is still losing money and, using officially recognised accounting benchmarks rather than self-adjusted ones, analysts do not expect the company to turn a profit until 2025 at the earliest.

“The good news is gross transaction value (GTV - the total value of all orders received by the platform) rose 9% year-on-year in the fourth quarter and 9% for the whole of 2022.

“However, currency movements helped the numbers a little, adding three percentage points to the headline GTV growth figures, so the like-for-like growth was 6% for the fourth quarter and 7% for the year.

“Meanwhile, orders fell 2% year-on-year in the fourth quarter as consumers pulled in their horns in the face of the cost-of-living crisis. Inflation did the rest as gross transaction value per order rose 11% to £23.90. UK order volumes were flat, while the international business saw a 5% year-on-year drop in Q4.

“Just as challenging is the loss of momentum in monthly active customers, while average monthly order frequency is stuck at 3.4 – which makes a bit of a mockery of chief executive Will Shu’s pre-IPO marketing spiel about how Deliveroo was targeting all of the ’21 meal occasions a week,’ as he put it.

Source: Company accounts. *Numbers from Q1 2021 onwards exclude the Netherlands and Australia.

“Given the near-term failure to live up to such hype, and the ongoing losses, Deliveroo’s shares still languish nearly 75% below 2021’s 390p-a-share flotation price. Investors have long since tired of the ‘build-and-they-will-come’ strategy, as a customer land grab has generated only losses thanks to a market share war between Deliveroo, Uber Eats and Just Eat Takeaway, let alone restaurant chains with their own delivery services, while hungry consumers still also have the option to eat out or buy food from a supermarket or local store and cook it themselves.

“Deliveroo could yet revive its share price, if it can show profits and cash flow, and it is adjusting to the new reality by retreating from certain markets, such as Spain, the Netherlands and Australia, and focusing on those where its competitive position is stronger.

Source: Company accounts, Marketscreener, analysts’ consensus forecasts

“Deliveroo is not the only company by any means to rely on EBITDA, or self-adjusted financial benchmarks, to portray a positive picture. But relying on non-statutory benchmarks does little to help its case in the long run.

“Cynics, or at least those sympathetic to Mr. Munger’s point of view, will simply regard adjusted EBITDA as ‘earnings before bad stuff’, or EBBS. That sort of carefree counting may work in a bull market and when money is more or less free, thanks to zero interest rate policies (ZIRP) and Quantitative Easing (QE), but less well when interest rates are rising, and investors are in the process of discovering once again the real opportunity cost of money.

“By its very definition, EBITDA excludes interest (though at least Deliveroo is penalising itself here, as it has a net cash balance sheet), taxes, depreciation and amortisation, and then makes further adjustments on top, to put additional gloss on the numbers. If investors think that excluding multiple lines of accounting is a better way to look at the figures, then good luck to them, but Mr Munger does not think so, and his record at Berkshire Hathaway speaks for itself over a period of decades.

Source: Company accounts

“And if we really are moving from a forty-odd-year era of low energy, food, labour costs and ever-cheaper money to one where all become more expensive on a sustained basis then Deliveroo could find that move into the black all the harder to achieve – although drone delivery and other technological advancements to cut the cost of delivery over the last mile could yet be a saving grace for the company and its £1.6 billion market capitalisation (even if that would be much less good news for the hard-working riders).”