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Deliveroo shares: should I buy or avoid?

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At the end of March, Deliveroo (LSE:ROO) listed on the London Stock Exchange via an initial public offering (IPO). Deliveroo shares were highly anticipated prior to the IPO but I would argue that it was ultimately a major flop. The stock’s opening price was 390p per share. By close of trading on the same day, its price had dropped approximately 30% to 282p per share. As I write this, shares are trading close to 230p.

I consider the argument for and against Deliveroo shares and what I would do now.

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For Deliveroo shares

Looking at the case for Deliveroo shares, I do find a few positives I like about it as an investment. Its rapid growth is something to admire. Revenue and gross transaction value (GTV) both rose over 55% in 2020. The Covid-19 pandemic would have helped this as most of us would not have been able to dine in at our favourite eateries.

Deliveroo’s leadership believes this growth is just the beginning, which is a confident yet believable stance. This is another reason to add to my bullish argument. The food delivery market is now huge and Deliveroo could well take over with a massive chunk of a juicy market share.

Finally, Deliveroo is still founder-led. Will Shu who started the company back in 2013 is still CEO and majority shareholder. In simple terms, it will not have lost its initial aims, goals, and Shu’s desire and aspirations will only have increased which will serve it well. History does point towards founder-led firms doing well more often than not.

Against Deliveroo shares

Along with the positives, there are negatives too. My two main concerns are financial performance to date as well as competition in the marketplace.

Deliveroo is still generating substantial losses despite impressive revenues and rapid growth. Last year, it registered an operating loss of over £200m. The year before, an operating loss of over £300m. There is a risk this could be the case for some time and, in fact, these losses are linked to its growth. I am always skeptical about unprofitable companies, which is why I am a bit bearish on Deliveroo shares.

Next, competition is rife in the food delivery market. Deliveroo is faced with going up against other platforms such as Uber Eats and Just Eat. My concern stems from whether or not it has a unique selling point or competitive advantage. I struggle to find one right now.

My verdict

Right now, I would avoid Deliveroo shares. I just feel the negatives outweigh the positives and its disastrous IPO has put me off even more. However, I must admit that even though it has not got off to the best start on the London Stock Exchange, other firms flourished after unsuccessful IPOs. Facebook is one example that springs to mind.

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Jabran Khan 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.

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