When Deliveroo (LSE: ROO) announced that it was going public, few would have expected such a poor opening couple of weeks. In the first day of the company’s IPO, it fell 30%. It has since fallen further. This may indicate that investors are not overly confident about the future of Deliveroo. It also demonstrates that the stock may be overpriced. On the other hand, both Facebook and Uber suffered similar fates on their market debuts and have since reached all-time highs. Therefore, does the Deliveroo share price tumble offer a good time for me to buy, or is there further to fall?
Why has the Deliveroo share price struggled?
The first explanation for Deliveroo’s struggles is its overvaluation. Its IPO valuation priced the company at £7.6bn, despite the fact that the company is unprofitable and there is significant competition in the market.
This merges with the second major problem for Deliveroo, its aforementioned lack of profitability. Despite significant demand during multiple lockdowns, the company still posted an underlying loss of over £200 million for 2020.
Of course, unprofitable companies are not necessarily a bad thing investment-wise. Indeed, Airbnb is still unprofitable and it has performed excellently since its IPO. But with Deliveroo, many investors question whether the company will ever become profitable. In fact, recent moves to give gig workers more rights like employees is likely to increase labour costs in the future. Profitability for the company therefore seems a very difficult proposition in these circumstances, and this may cause the Deliveroo share price to fall further.
What are the positives?
The major positive is the revenue growth the company has experienced over the past few years. In 2015, it had revenues of just £18m, yet in 2019, this figure was near to £800m. This clearly shows that Deliveroo has clearly grown over the past few years and is now a very well-known company in a growing market. If the company can fend off its competition, the Deliveroo share price could soar.
In addition, the company is now valued at £4.75bn, which seems a lot more reasonable than its IPO pricing. This may offer an opportunity to buy a future star while its down.
Am I going to buy?
I believe the Deliveroo share price is more reasonably priced than in its IPO. But I still think it is overpriced. In fact, the company has a price-to-book ratio of around 27, which is a major indication of over-valuation.
In order for the founder to retain more control, Deliveroo has also opted for a standard listing, as opposed to a premium one. This means that it cannot be included in any of the FTSE-indexes, and ultimately, limits the company’s prestige. For a company that is already struggling to inspire investor confidence, I believe this is a worry. As such, I’m staying away from the Deliveroo share price. I think there are far better growth companies to go for instead, such as this one in the report below.
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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. Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Airbnb, Inc. and Facebook. The Motley Fool UK has recommended 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.