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Deliveroo shares: should I buy after the IPO?

Image: Deliveroo

Back in December, I said I’d look out for Deliveroo (LSE: ROO) shares. The company made its London stock market debut last week through an Initial Public Offering (IPO). But some are dubbing it as the worst IPO in London’s history.

The stock fell significantly from its IPO issue price of 390p. I guess investors who locked in early are somewhat angry, but it’s still early days. This is why I steer clear of IPOs generally and did the same with Deliveroo shares. Here’s my take on the stock.

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Deliveroo: an overview

So what does Deliveroo do? In a nutshell, its an on-demand food delivery company. It was founded by Will Shu, the current CEO, in London in 2013.

It allows people to order food from local restaurants and grocers using its technology. Its riders then deliver the food and the consumers can track the status and location of their food order.

Why IPO?

I can’t ignore Deliveroo’s phenomenal sales growth, even though it’s still a loss-making company. The coronavirus crisis has only fuelled that growth further. Many consumers have been using Deliveroo’s services through the pandemic’s lockdowns. So it made sense for its owners to capitalise on this opportunity and bring the company to market on a high.

But I question, whether consumers will continue to use Deliveroo’s services at the same rate after the pandemic. In the UK, lockdown restrictions are starting to ease. This means people will start to socialise and dine out. I don’t think this bodes well for Deliveroo shares, at least in the short term.

Valuation overpriced

I reckon part of the reason why Deliveroo shares flopped after its IPO was that the valuation of £7.6bn was simply too high. This was evident from how the stock fell after making its London debut.

I’ve commented on how investors should be wary about IPOs before. One of the reasons why I don’t get involved in an IPO, or the period shortly after the float, is the lack of information available.

What I’ve got to rely on is an IPO prospectus as my primary source of information and that has been written by the very same investment banks that are running the float. I’ll be monitoring Deliveroo shares for now, but definitely not buying.

Institutional investors staying away

I’m not alone in avoiding the share though. I think there are other reasons why Deliveroo shares slumped on its IPO. Institutional investors such as Aviva and L&G have shunned the company due to concerns over workers’ rights.

City investors have raised governance issues regarding Deliveroo’s self-employed riders. These include reports that pay and working conditions are below standard and less than minimum wage.

Institutional investors have also raised concerns over Deliveroo’s shareholder structure. After IPO, Shu retains 57% of the voting rights. This means that he can potentially block any future company reforms. This makes me uncomfortable as minority shareholders will get little protection.

I think it’s great that another tech company has listed in London. But as I said, for now it’s not for me.

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Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.