Deliveroo flops, but retail investors can sell on Wednesday. What would I do?

After Deliveroo delivers the worst opening for a London share flotation in 10 years, what went wrong? And what might shareholders do with their stock now?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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!

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.

Cliff D'Arcy does not own shares in Deliveroo. 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.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »