It’s been a depressing month so far for shareholders in Deliveroo (LSE: ROO). The online food-delivery service floated its shares to great fanfare on Wednesday, 31 March. With the shares priced at 390p each, this valued the group at £7.6bn. But the Deliveroo share price collapsed right from the off — and kept plunging in April.
Deliveroo shares dive
Unlike most other IPOs (initial public offerings of shares), Deliveroo failed to deliver a first-day share boost. Instead, Deliveroo shares dived, hitting a low of 271p, before closing at 287.45p. That’s a first-day crash of more than a quarter (26.3%). By Monday, 12 April, the Deliveroo share price had declined another 20p, closing at 251p.
After a brief rally eight days ago, Deliveroo shares have resumed their descent. As I write, they trade at 231.12p, having earlier dropped to a lifetime low of 226.5p. Thus, ROO stock is now trading at a discount of more than 40.7% to the IPO price. This values the group at £4.3bn, £3.3bn below the IPO valuation. Have Deliveroo shares now fallen far enough for me to take a punt on them?
Deliveroo is a falling knife
One old City saying springs to mind when I look Deliveroo shares in a chart: “Never catch a falling knife”. In other words, don’t buy a share that is crashing, because it could get bloody. In stock markets, no-one rings a bell to tell you when a share price has finally reached its bottom. What’s more, making short-term predictions about share prices is akin to guesswork.
Opinions are split on ROO’s immediate future. On one hand, Mark Hiley of research firm The Analyst reckons that, despite having fallen by 40%, Deliveroo shares could fall another 40%. This would take them to 140p. That’s a whopping 250p below the share price. To be honest, at 140p, I would definitely have a punt on the ROO share price rebounding.
On the other hand, Deliveroo is growing really, really fast. As I said at the float, this is a growth company for growth investors. Orders in the first quarter of 2021 more than doubled, rising 114% compared to the first quarter of 2020, to exceed 71m. Gross transaction value in January to March was up 130% year-on-year to £1.65bn (versus £715m). If growth were to continue at this breakneck pace, then this could be good news for Deliveroo shares.
Should I buy Deliveroo today?
My family portfolio is mostly focused on FTSE 100 value shares paying decent dividends. But I’d like to diversify — and maybe boost portfolio performance — by adding a few growth stocks. However, what happens to Deliveroo when lockdowns end and consumers return to spending in real life, outdoors? Also, Deliveroo operates in a cut-throat market and faces multiple legal challenges to its employment practices. Then again, how much of this is already baked into these cut-price Deliveroo shares?
At just over 230p, Deliveroo is obviously more attractive to me than at the IPO price of 390p. Nevertheless, I’m going to reject the opportunity to buy today. As an older, more risk-averse investor, Deliveroo shares don’t yet have the right risk/reward profile for me. But I fully understand younger investors with greater risk appetites being willing to back Deliveroo. After all, they are the ones using its fast-growing service the most!
