Should I buy shares in Deliveroo or Tesco?

Deliveroo shares have been out of favour since IPO, while Tesco stock is down too. Are either of these viable long term investments for me?

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The Deliveroo (LSE:ROO) share price disappointed investors at its initial public offering (IPO) in April when it spectacularly flopped. Today it’s down 10% from the IPO, but it has recovered 14% from its 52-week low.

A disheartening start

It was undoubtedly among the most highly anticipated IPOs of the past year. After the tech boom in the US markets, London had high hopes for a similar success story at launch. Unfortunately, I think the excitement of 2020 had been replaced with the grim reality of a post-pandemic economy, and investors couldn’t see as much long-term value in Deliveroo as hoped.

Besides, with the reopening upon us, there was doubt in their minds that Deliveroo’s rampant success at the height of lockdown could continue as restaurants and bars started opening again.

Buyer beware

So, nearly three months later, is the outlook for Deliveroo stock any better? There are a few reasons I doubt it.

Firstly, if the company has to unionise, its workforce could affect its margins. This comes after London’s 70k Uber drivers formed a union following years battling legal challenges.

Then there’s the fact institutional investors were steering clear of Deliveroo at IPO and still seem disinclined to add it to their funds. According to the Financial Times, Europe boasts over 18k mutual funds, and to date, only four of them have added Deliveroo stock.

The way Deliveroo’s shares are structured gives an unusual amount of power to the CEO. This leaves other investors at a disadvantage regarding decision-making, which is one reason why institutional investors are steering clear.

However, its Q1 results showed signs of growth, with a rise in global orders for two years running. This is encouraging as it indicates that growth may not only be in response to the pandemic. And if its growth targets for 2021 meet or exceed 2019 levels, then the investor outlook would be more enticing, reflecting well in its share price.

But for me, I think a promising growth story is pinned on hope. I’m not a Deliveroo customer, and I’m not tempted to add Deliveroo shares to my Stocks and Shares ISA.

Is Tesco a better investment than Deliveroo?

Tesco (LSE:TSCO) is another pandemic beneficiary that has lost its edge in recent months. It carried out a share consolidation in February, reducing the number of shares existing shareholders held. But they received a special dividend for their original number of shares. Since then, the Tesco share price has remained fairly flat.

Nevertheless, Tesco has staying power. It has several revenue streams from its supermarkets to convenience stores, wholesale division, retail banking, and insurance services.

Ordering Tesco groceries online is straightforward and convenient, but the company has invested heavily in staying competitive. Therefore, it has considerable debt.

Competition is rife in the grocery arena, from its supermarket peers to the discount rivals and digital disruptors like Ocado and Amazon. Yet I think it’s still got plenty to offer and doesn’t look in danger of being left behind any time soon.

Tesco keeps up with (and ahead of) trends thanks to the consumer data it holds via its Clubcard. Its forward price-to-earnings ratio is 13, and its dividend yield is 4%.

There are other UK stocks I’d prefer to buy, so I’ve no plans to invest in Tesco for now, but I’ll keep it on my watch list.

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. The Motley Fool UK owns shares of and has recommended Amazon. Kirsteen owns shares in Amazon. The Motley Fool UK has recommended Ocado Group, Tesco, and Uber Technologies and has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 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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