Bad news for Deliveroo (LSE: ROO) shareholders. The food-delivery company’s shares floated in London today, but the Deliveroo share price collapsed. That’s upsetting for individual investors who paid 390p a share.
The Deliveroo share price crashes 30%
In 2020/21, IPOs (initial public offerings) in the UK and US have generally delivered bumper first-day returns. Typically, these opening ‘pops’ ranged from 20% to 100%+. However, the Deliveroo share price immediately crashed, plunging from 390p to 271p. That’s a collapse of 119p, more than three-tenths (30.5%). The shares have since bounced back and currently stand at 297.5p. That’s still a fall of 92.5p — almost a quarter (23.7%). Yikes.
Early warning signs
In January, Deliveroo raised $180m from existing investors at a valuation exceeding $7bn (£5.1bn). A month ago, it hoped to be valued at $10bn (£7.3bn). A week ago, the Deliveroo share price range was set at £3.90 to £4.60. This valued the group at £7.6bn to £8.8bn, making this the largest London IPO for a decade.
However, several influential institutional investors declined to participate in this IPO. They included Aviva, Legal & General, and Aberdeen Standard. They expressed concern over Deliveroo’s employment practices. They also disliked dual-class shares that hand extra votes to co-founder Will Shu for a further three years. Hence, they declined to invest in the eight-year-old business. Thus, the initial Deliveroo share price was reduced to the very bottom of its range (390p).
Is it worth £5.8bn today?
With the Deliveroo share price at 297.5p, the group is worth £5.8bn. That’s a hefty price for a loss-making business. Deliveroo argues it is a tech business due a premium rating, like US tech stocks. As a veteran value investor, I disagree. I wouldn’t class Deliveroo as a tech company. When I look at its asset-light business model, I see an intermediary or distributor in an ultra-competitive market. It may have a snazzy app and website, but the hard work is done by roughly 100,000 ‘independent contractors’ (self-employed delivery agents, mostly young cyclists).
If Deliveroo had to pay the minimum wage to those delivery drivers as employees, I struggle to see how it would overcome the terrible unit economics of home delivery. Hence, I would not invest today, even at the lowest Deliveroo share price of 271p.
This is a growth company for growth investors
Then again, I see how Deliveroo might appeal to growth investors. It’s clearly an innovative, adaptable and high-growth business. In the first two months of 2021, transactions more than doubled by value (UK: +130%) year-on-year. But Deliveroo lost £317.7m in 2019 and £224m in 2020. For much of 2020/21, the world has been locked down and restaurants mostly closed. Yet Deliveroo lost almost £19m a month during absolutely perfect business conditions. Also, it expects sales growth and margins to fall in 2021, as pandemic lockdowns end and eating-out resumes. That cannot be good news for Deliveroo’s hyper-growth.
In my view, the real winners from this deal are Deliveroo (raising £1bn in net proceeds) and existing shareholders (including Will Shu and Amazon), selling £500m of shares. Finally, whatever happens to the Deliveroo share price in the next few days, 70,000 retail investors are locked in for a week (until Wednesday, 7 April). I sincerely hope the price doesn’t fall any more before then. If I’d been a shareholder, I’d rename it Deliveroops or Deliverouch today!
