As Deliveroo share price rises, concerns about buybacks remain

Food delivery companies are making a comeback as inflation falls and demand rises. On Wednesday, I wrote about India’s Zomato, which achieved profitability ahead of schedule. In the UK, Deliveroo (LON: ROO) share price jumped on Thursday after the company announced solid results and launched a share buyback program.

Deliveroo share buyback program

Deliveroo stock price jumped after the company announced strong financial results., helped by higher prices. Orders in the first half of the year dropped by 6% to 145.2 million. Gross Transaction Volume (GTV) rose by 3% to £3.50 billion.

In the same period, revenue rose by 5% and crossed the important milestone of £1 billion. The company’s EBITDA rose to £39.4 million from a loss of over £51.6 million in the same period in 2022. Deliveroo's loss narrowed to £82.8 million in the first half of the year.

Despite the big loss, the company decided to implement a share buyback of £250 million, bringing the year-to-date returns to £300 million. Deliveroo is able to do that because of its strong balance sheet of over £947 million. The company’s CEO said:

“Against this backdrop of strategic progress and growth opportunity, the Board has considered our strong capital position and is proposing an additional £250 million capital return to shareholders.”

Still, there are questions about whether buying back shares is the best approach to allocate capital for a company that is still making a loss. Share buybacks create value by reducing the number of outstanding shares, thus increasing the earnings per share.

I believe that having more cash in its balance sheet is better because of the rising interest rates. Deliveroo generated £15.4 million in interest income in the first half of the year. As such, it can generate more free cash since the Bank of England (BoE) is expected to maintain higher rates for a while.

Some of the biggest companies like Amazon, Meta Platforms, and Meta Platforms started buying back their shares when they became highly profitable.

Deliveroo share price forecast

ROO chart by TradingView

The daily chart shows that the Deiveroo stock price bottomed at 78.25p early this year. Since then, the shares have jumped by more than 65%. Along the way, they have risen above the 200-day and 50-day moving averages. Most recently, the stock flipped the important resistance point at 115.60p into a support.

The stock has formed an ascending channel shown in red and is slightly below the upper side. Therefore, the outlook for the stock is bullish as long as it remains above the 50-day moving average. The target for the stock is at 150p.