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Why was the Deliveroo IPO so bad?

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A Deliveroo rider cycles in London
Image: Deliveroo

The Deliveroo (LSE: ROO) IPO has proved one of the worst in recent history. The food delivery company’s shares floated on the London Stock Exchange on March 31 for an issue price of 390p. The price then plummeted 30%+ to 271p. It has risen to 282p as I write — still a harsh loss for investors who grabbed the early shares.

Deliveroo’s history

Founded in 2013 by William Shu, the online delivery service is a giant in its market. Although it still operates at a loss, it has boasted encouraging growth in recent years, in line with Shu’s strategy of pumping cash into scaling up operations and business reach.

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2020 losses shrank 40% to £224m, and in the first two months of 2021 transactions more than doubled in year-on-year value. While this seems encouraging for growth investors, there are some key reasons the IPO saw share prices slumping.

Reasons the Deliveroo IPO failed

Firstly, the IPO couldn’t have come at a worse time. The UK economy is finally opening up, with restaurants and pubs set to begin opening their doors on April 12. Food delivery services such as Deliveroo were able to capitalise on lockdowns as people wanted restaurant-quality food delivered to their homes. However, this won’t be the case as of a week’s time as people will be eager to eat out. Holding an IPO now seems bad timing when taking this into consideration.

In addition to this, March 31 was the final day of the first financial quarter of 2021. This is a very important time for fund managers. They tend to review their portfolios and rebalance positions. It’s certainly not the time to jump on board a volatile investment such as an IPO.

There are also ethical issues behind this IPO. Many top institutional investors including Legal & General, Aviva, and BMO Global announced they would be steering clear of the IPO due to the poor treatment of workers. Research by the Bureau of Investigative Journalism showed that a third of workers are paid less than minimum wage. This is largely down to the zero-hour contacts and ‘flexible’ pay structure of Deliveroo. Many long-term investors take this into consideration. They’re looking for more than just a profitable business. They want a solid ethical approach.

A final reason for the abysmal Deliveroo IPO is around the valuation of the company. The float was projected to increase Deliveroo’s total value to £7.6bn. The decline in share price that followed knocked a hefty £1.2bn off this. A market cap of £7.6bn would have meant the company was worth 6.4 times the previous year’s revenue. This seems rather steep considering rival Just Eat Takeaway.com is valued at only 4.8 times revenues.

So with all those negatives, why did the share price start to rise again after its plunge? Well, Deliveroo is a growing business and has strong potential. One plus point is that it has announced it will expand its grocery delivery service throughout 2021. This is the fastest-growing part of the business. The expansion will offer grocery delivery to an additional 125 towns and cities, taking the total to 300 for the UK. That could help it on its drive for profitability.

That said, bad timing, workers’ rights issues, and skewed valuation meant this IPO was always going to face a rocky ride. I won’t be adding any Deliveroo shares to my portfolio for now.

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Dylan Hood has no positions in any of the shares mentioned. The Motley Fool UK has recommended Just Eat Takeaway.com N.V. 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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