Short sellers, an unfortunate roadshow, and terrible timing were all blamed as Deliveroo lost more than a quarter of its value on its first day of trading, becoming in the words of one of its bankers: “the worst IPO in London’s history”. (Bradshaw, 2021)
The Foundation
Deliveroo’s IPO seems to have been a failure so far, but what does it mean for us, investors?
The company still trades under a conditional basis, meaning that all trades places until the 7th of April may be voided if the stock fails to fully list on the secondary market. In this case, all funds used in-stock purchase will be returned to your account and the business will remain private.
There are three main reasons to blame for the stock’s poor performance on its debut. First, institutional investors are concerned about regulatory issues Deliveroo may face due to its courier’s employment agreement. Recently in the UBER case, a legal suit from drivers against the company was ruled out against the latter concluding that from the time drivers were logged in the app and ready to ride, they were classified as “workers” and should be entitled to minimum wage and holiday pay. While it’s not clear yet if and what kind of regulation will affect Deliveroo, investors are certain that these headwinds are far greater than any opportunity the company may offer.
Second, there is the financial problem, Deliveroo claims to run on an operating loss to grow faster and attract more customers and restaurants to its platform, although in 2019 if not for an investment of about 16% of the company from Amazon which is now the biggest shareholder Deliveroo could have gone bankrupt. The operating losses, which is sort of the rule of thumb for tech companies going public lately, the problem is that the majority of those companies do not have such a high regulatory risk as Deliveroo, thus leaving investors wondering how far the capital raise from the IPO proceeds can go in terms of investment in the business rather than the hurdle of higher costs attributed to its workforce.
Finally, the timing. As vaccine rollout gets the pace in the UK and the US, the “back from home” rotation trade starts to take place, DoorDash, a food delivery company based in the US saw its share price decreased 41.6% since the peak in early February.
Valuation
Looking at its American peers, Deliveroo trades at a much lower EV/Revenue multiple due to its significantly lower TAM and gross margin, but at a much higher growth rate than UBER and almost a quarter of DoorDash, which is enough reason to be worried since delivery apps should have been benefited from continuous lockdowns and Deliveroo seems to have struggled in the beginning.
All considered, I do not see Deliveroo with good eyes given the significant regulatory headwinds and as the “at home” trade starts to see some rotation towards value stocks. Albeit, there is plenty of growth opportunity available event though competition in the sector is fierce.
Sources:
Financial Times
Bloomberg
Refinitiv EIKON
Deliveroo Investor Relations