The share price of food-delivery app Deliveroo (LSE: ROO) was up strongly as markets opened this morning. Is it too early to say that we’ve now seen the end of the IPO sell-off? Let’s start by looking at the reasons for being positive.
Buy the dip?
One reason for thinking that we may have already seen the worst is that Deliveroo’s current valuation (£4.8bn) is now far more sensible than its price at IPO (£7.6bn). That’s clearly a lot more palatable for prospective investors looking for stocks boasting market-leading tech. On top of this, I can’t ignore that the firm has been growing revenue like the clappers over the last few years. It also operates in 12 countries, giving the Will Shu-led business some geographical diversification.
Another reason for thinking the Deliveroo share price might stabilise (and eventually rebound) is that other tech-related stocks have done just that. The share prices of US social-networking giant Facebook and ride-sharing specialist Uber famously tumbled on their market debuts. They’ve since recovered strongly. Indeed, the former is now one of the biggest listed companies in the world! Sure, other previously-hyped UK stocks such as Aston Martin show that recovery is far from guaranteed. Nevertheless, Deliveroo’s existing investors can take heart knowing that it’s not impossible.
That said, there are still a lot of things that bug me.
Reasons to steer clear
Surely one of the biggest drawbacks to investing in Deliveroo remains the competition the company faces. Rival Just Eat Takeaway.com has 10 times the number of active customers. Even so, this isn’t reflected in the valuations of the two businesses. (£11bn vs Deliveroo’s £5bn). Having been around longer, the former also has a financial track record that we can properly scrutinise.
Speaking of which, Deliveroo still doesn’t make a profit. Now, that’s not held back other tech-related shares in the past. Electric car-maker Tesla is a great example. However, it’s worth reminding ourselves that these can be among the hardest-hit shares in the event of a market crash. Regardless of whether this happens soon, Deliveroo could still become a victim of the move towards value stocks we’ve seen over recent months.
Third, there’s the ongoing threat of industrial action by its riders. Indeed, one reason given for the shambolic Deliveroo IPO was that institutional investors were concerned over how its workers were being treated. Many will continue to keep their distance unless these worries are put to bed. This, in turn, could hold the share price back.
On top of all this, the gradual lifting of coronavirus-related restrictions might make things tougher for Deliveroo going forward. After all, a lot of people look primed to spend in restaurants rather than on takeaways for the rest of 2021. Some (temporary) softening of demand looks inevitable.
Better opportunities elsewhere
I don’t know where the Deliveroo share price is going in the near future. Nobody does. There are simply too many variables to take into account when trying to estimate where the company’s valuation will be in a few days or weeks.
As a long-term investor, however, I still have significant doubts about the company’s ability to make me and other investors more money compared to other highly profitable growth stocks.
Have we seen the bottom? I wouldn’t count on it.
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. Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Facebook and Tesla. The Motley Fool UK has recommended Just Eat Takeaway.com N.V. and Uber Technologies. 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.