Deliveroo remains loss-making despite significant market tailwind, and Pearson targets digital learning opportunity

“The FTSE 100 made a solid start to the week underpinned by renewed gains for oil off the back of attacks on facilities in Saudi Arabia over the weekend,” says AJ Bell Investment Director Russ Mould.

“This lifted index heavyweights BP and Royal Dutch Shell as the black stuff traded above $70 per barrel for the first time since January 2020 when tensions between Iran and the US were rapidly escalating.

“The only problem is the rise in oil will only add to the key concern which is dogging markets – namely the risk of runaway inflation and a resulting increase in interest rates.

“The other key driver for positive sentiment this morning is also a double-edged sword with the news that the US has signed off its long-awaited $1.9 trillion stimulus package. This is also seen as a major catalyst for rising prices.”

Deliveroo

“After the fanfare of how Deliveroo is going to reward drivers with bonuses and give customers a chance to buy the shares, here comes the hard facts. The most important point is how the company remains loss-making despite experiencing a surge in business going through its platform during the pandemic.

“It’s hard to see it’ll have another year when market factors were so much in its favour. Lockdowns kept people at home for months at a time and online grocery slots were hard to come by, so demand for takeaways shot up. A cynic might ask, if Deliveroo couldn’t deliver a profit against that backdrop, when will it?

“Fans of the business will point out that it has narrowed its losses by nearly 30% and that its underlying gross profit has shot up, both in absolute terms and as a percentage of the gross transaction value. That’s likely to be enough to fuel interest for many people in the shares when they come to the London market.

“But the fact remains that it is still loss-making once accounting for the costs of running the business. This goes to show that delivering food is not a quick win. It’s about building scale and there are several other firms running the same race.

“Deliveroo says it will continue to invest in its business which could impact profitability. It has no choice as rivals are doing the same. At some point down the line, it will have to start delivering that magic profit or investors will lose interest.”

Pearson

“For a company whose focus is on education it seems somewhat odd that a planned focus in three core markets – digital learning tools, workforce skills gaps and demand for accreditation and certifications – has resulted in a structure with five different divisions.

“But that’s the formula new chief executive Andrew Bird has produced to revive a business which has endured a patchy few years littered with profit warnings.

“Another interesting feature of Pearson’s new strategy is a big reduction in its property footprint as it plans to adapt to more home working.

“Pearson’s move follows in the footsteps of other major companies such as banking firms Lloyds and Barclays and could well send a chill through the office property space.

“Pearson’s central problem has been the structural decline of the academic textbook market. Previously the sale of these expensive tomes was extremely lucrative for Pearson, but now much more learning is taking place online.

“Pearson’s indifferent performance has seen the company become one of the more heavily shorted firms on the UK market.

“Pearson is working hard to become a beneficiary rather than a victim of the shift towards a more digital education sector – which like many trends has been accelerated by the pandemic. It has already invested heavily in this area which is a good start.

“If former Disney man Bird can lead the kind of comeback for Pearson that could grace a Hollywood movie, shareholder murmurings about his salary and California residence will likely die down.”

These articles are for information purposes only and are not a personal recommendation or advice.