Deliveroo (LSE: ROO) didn’t exactly sparkle after IPO at the end of March, with its shares falling from day one. But since early June, the Deliveroo share price has turned around and looks to be heading upwards.
I’m getting used to seeing UK stock market flotations turning into flops. But I’m starting to wonder whether Deliveroo might just buck the trend and provide sustainable, long-term investment gains.
The biggest conundrum for potential investors right now is, I think, that Deliveroo has no profits that we can use to estimate a valuation. But over in the US, companies regularly come to market in such condition. And they often do very well for investors. Are we just more risk-averse here in the UK?
Where’s the Deliveroo share price going?
Maybe we are, but Deliveroo is active internationally too, and that part of its business is also growing strongly. That could help attract global investors to the stock. But anyway, what’s been happening to the Deliveroo share price?
The IPO was priced at 390p, but the rot set in even on opening day. And by 23 April, the stock had slumped to 224p. That’s a 43% drop from the offer price, in just a little over three weeks. But then the price steadied, and started back up during June. Since the end of May, Deliveroo shares have gained 36%.
X-rated movie appearance?
We’re still below IPO level, but the gains do suggest that sentiment is changing. Why might that be? Well, according to The Sun, an actor wearing the firm’s “distinctive uniform” has just appeared in an X-rated film, so there’s publicity there. But maybe that’s not the reason. After all, I can’t imagine viewers being distracted into thinking “Oh yes, I must buy some Deliveroo shares“.
No, I think it’s far more likely that a recent court ruling has had something to do with the Deliveroo share price surge. The UK Court of Appeal ruled that Deliveroo riders are self-employed. The Independent Workers’ Union of Great Britain had appealed an earlier judgment. But the latest decision marks the fourth time a court has decided in favour of the company.
Growing sales
That’s one key bit of uncertainty removed, which could have increased Deliveroo’s UK costs significantly had it gone the other way. The next, and more important, uncertainty is whether there’s sufficient potential there to justify a high growth valuation.
On that score, Deliveroo’s first-quarter update brought home the goods. Orders were up 114% year-on-year, with gross transaction value up 130% to £1.65bn. The UK and Ireland led the way, but International growth wasn’t far behind.
Further share price gains?
All eyes will surely now be on Deliveroo’s first-half results. If they continue the trend set by the first quarter, I think there’s a decent chance we’ll see the Deliveroo share price finally getting back above flotation. But if the figures fall even slightly short, the shares could turn south.
On balance I’m positive. But I won’t buy, as my days of investing in not-yet-profitable growth shares are behind me.
