Last Wednesday, excitement surrounded the initial public offering (IPO) of Deliveroo (LSE: ROO) shares in London. At the float price of 390p, the food-delivery group was valued at £7.6bn. To me, that was a steep price tag for an eight-year-old business. As a value investor, I prefer boring companies with consistent revenues, cash flows, earnings and dividends. Hence, I avoided the Deliveroo IPO, and I’m relieved.
Deliveroo shares flop
Since 2020, US and UK IPOs have often delivered bumper first-day price rises. Alas, the Deliveroo flotation — the largest London IPO since 2011– flopped. The shares quickly crashed to 271p, losing 119p — down over three-tenths (30.5%) — within minutes of the market open. On Thursday, the shares ranged between 275p and 294p, before closing at 282p. That’s a loss of 108p (27.7% to date).
Retail investors lose £13.8m
Deliveroo raised £1bn by selling new shares, while existing shareholders sold £500m of stock. However, only £50m of shares were offered to the general public, a thirtieth of the total. Around 70,000 individuals took up Deliveroo’s offer of piping-hot shares, many via its app and website. Losses for these retail investors total £13.8m so far. Retail investors could invest up to £1,000 each, so the loss to date is around £277 per £1,000 invested.
However, this also means that 96.7% of the IPO shares were sold to institutions and existing holders. These big players could have lost roughly £2.1bn from the price collapse from 390p to 282p. Then again, some shareholders had invested in Deliveroo much earlier and at prices way below the IPO price. Hence, early-bird investors selling are surely the biggest winners from this float.
Why I didn’t invest
Four issues deterred me from investing in Deliveroo. First, I viewed £7.6bn as too high a valuation for a heavily loss-making business founded in 2013. Second, I don’t see Deliveroo as a tech company, but as a logistics company working in a fiercely competitive, low-margin market. Third, designating workers as independent contractors instead of employees means that riders and drivers aren’t entitled to the National Minimum Wage. Fourth, I dislike dual-share structures that hand excessive voting power to founders or early investors. Thanks to these four red lights, I dodged the ‘Deliveroo droop’.
An alternative view of Deliveroo
My IT-savvy friend and young investor Tooda Moon has a very different view of this business. He likes the stock, because (in his words): “It’s not about delivering food. It’s about data capture. What food you like, when, and where. And then selling that data to advertisers.” Tooda Moon goes on to say: “Recently, I ordered some fancy pasta from Deliveroo. I left a five-star review afterwards. Now my social-media feeds are full of adverts for upmarket pasta. It’s all about data capture. Food delivery is not Deliveroo’s product. End users’ data is the real product.”
I’d sell, but Tooda Moon would buy
To sum up, investors can look at Deliveroo from various different angles. I see a string of large losses and would sell the shares, because, in City terminology, “the first cut is the cheapest”. My buddy Tooda Moon sees a bona-fide tech business and would buy at the current price. For now, let’s just see what happens to the share price on Wednesday, when retail trading begins!
