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The Deliveroo share price tanks following its IPO! This is what I’d do now

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Graph Falling Down in Front Of United Kingdom Flag
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It’s been a tough first day for Deliveroo (LSE: ROO) and its share price. On Wednesday the food delivery firm finally started trading as a member of the London Stock Exchange. It’s hard to see how the company could have got off to a worse start.

This isn’t just because Deliveroo had to set its IPO price at £3.90 per share. This is at the lowest point of a range which went as high as £4.60. And it’s a move which reduced the company’s value by a whopping £1.2bn.

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It’s because the Deliveroo share price absolutely tanked from that offer price when conditional trading began. It fell as much as 30% before paring losses. Still, at £2.85 per share, it remains 27% lower than that offer price.

Deliveroo’s share price plummets

Buying a company when it first lists its shares is always risky business. The sort of volatility that the Deliveroo share price has witnessed today can be common. Though that’s not to say that IPO choppiness doesn’t sometimes work in the favour of UK share investors. I recall that the Royal Mail share price absolutely rocketed when its shares first started trading in London back in 2013.

It’s perhaps no surprise to some that the Deliveroo share price has belly flopped on its debut, though. Several fund managers said that they would shun the takeaway titan over concerns about how it treats its workers. Those running the EdenTree Sustainable and Responsible UK Equity Fund, for example, claimed that “the Deliveroo business model is best characterised as a race to the bottom with employees in the main treated as disposable assets.” It sunk the knife in further by claiming that “[this] is the very antithesis of a sustainable business model.”

A Deliveroo rider cycles in London

Said concerns were behind Deliveroo’s reason to put its offer price at the lower end of the range. But chatter concerning worker rights isn’t the only thing to have rained on Deliveroo’s IPO. Traders are also considering whether the takeaway market has already peaked during Covid-19 lockdowns.

Finally, chatterings that the Deliveroo share price remained overvalued despite the company setting its offer price at £3.90 has also prompted the collapse. As analyst Sophie Lund-Yates of Hargreaves Lansdown says: “a market cap of £7.6bn means the company’s worth 6.4 times last year’s revenue, which is some way above rival Just Eat’s 4.8 times.”

Should I buy this UK share?

As I said, buying a UK share when it first begins trading can be risky business. But is now a good time to buy Deliveroo following today’s share price plunge? I’m bullish on the UK takeaway market and think it should continue to grow strongly over the medium to long term following a sharp dip in 2021. In addition to this, I like the fact that Deliveroo could choose to turbocharge expansion using the proceeds of its IPO.

That said, I fear that the Deliveroo share price still looks too expensive despite today’s fall. The firm operates in a highly-competitive area, and one in which the issue over workers rights is becoming an ever-hotter potato, which makes this particular UK share too risky in my opinion. I’d much rather buy other UK shares right now.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown and Just Eat N.V. 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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