The Deliveroo share price delivers a 30% fall. What went wrong?

On its first day of trading, the Deliveroo share price crashed by 30% fall. But shareholders are trapped for a week, so what next?

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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!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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