For companies that have a large retail customer base, listing on the stock exchange can be an opportunity to further gain publicity with this group. One way to do this is by allowing people like me to buy into the initial public offering (IPO). This opportunity is usually reserved for larger banks or institutional investors, but doesn’t have to be the case. Deliveroo (LSE:ROO) decided to allocate some funds to retail investors for the IPO last week. I was allocated some Deliveroo shares, but after the first day of trading, was this a bad move?
Why the sudden drop?
From the offer price of 390p, its shares are currently trading around 280p, giving me an unrealized loss of around 30%. Given that I’ve only held the stock for a few days, it’s not a great start. The retail allocation was around £50m, and so there’s around 70,000 other investors in a similar position.
After the hype leading up to the IPO, a few stumbling blocks can be seen as the main reasons for the sharp fall. One reason was the pullout of some large investors. Aberdeen Standard Life and Aviva are two examples that declined to stump up funds and buy in. The reputation of these kind of investment and pension funds in the industry is very good. So the decision to pass on the biggest IPO in the LSE in a decade certainly caused some panic when Deliveroo shares started to trade.
Another reason was the recent news around worker’s rights. Earlier in March, Uber lost a court case, which means its drivers are classified as employees, and need to be given minimum wage and holiday pay. With this precedent, Deliveroo riders could be seen to fall under the same category. If this is the case, then Deliveroo will have to take on a lot more HR responsibility.
My outlook for Deliveroo shares
The first few weeks after an IPO usually see high volatility. Deliveroo has seen its share price creep lower, but it’s still only been trading for a short period of time. As a long-term investor, I’m more concerned about where Deliveroo shares will trade in a couple of years. And I still think the outlook is positive.
The company did lose £223.7m during 2020, but is on a growth trajectory that I think should lead it to break even this year. For it to become profitable at still a relatively early stage (it was founded in 2013) impresses me. There is a huge scope for further growth, considering that Deliveroo is only operating in 12 countries (as of last year).
One risk with Deliveroo is that it might not be able to shake off this poor IPO start, and see funding and opportunities dry up if companies don’t want to associate itself with the brand. I think this is unlikely and, pending resolution on the workers rights, think its shares should recover.
In case I’d forgotten, Facebook shares flopped on initial trading when it first listed, but being patient and holding on yielded rich results. I think the same could be true to Deliveroo, so am holding my shares.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. jonathansmith1 owns shares in Deliveroo. The Motley Fool UK has no position in any company 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.