The Motley Fool

Deliveroo shares still look expensive to me

Image: Deliveroo

It’s been a depressing month so far for shareholders in Deliveroo (LSE: ROO). The online food-delivery service floated its shares to great fanfare on Wednesday, 31 March. With the shares priced at 390p each, this valued the group at £7.6bn. But the Deliveroo share price collapsed right from the off — and kept plunging in April.

Deliveroo shares dive

Unlike most other IPOs (initial public offerings of shares), Deliveroo failed to deliver a first-day share boost. Instead, Deliveroo shares dived, hitting a low of 271p, before closing at 287.45p. That’s a first-day crash of more than a quarter (26.3%). By Monday, 12 April, the Deliveroo share price had declined another 20p, closing at 251p.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

After a brief rally eight days ago, Deliveroo shares have resumed their descent. As I write, they trade at 231.12p, having earlier dropped to a lifetime low of 226.5p. Thus, ROO stock is now trading at a discount of more than 40.7% to the IPO price. This values the group at £4.3bn, £3.3bn below the IPO valuation. Have Deliveroo shares now fallen far enough for me to take a punt on them?

Deliveroo is a falling knife

One old City saying springs to mind when I look Deliveroo shares in a chart: “Never catch a falling knife”. In other words, don’t buy a share that is crashing, because it could get bloody. In stock markets, no-one rings a bell to tell you when a share price has finally reached its bottom. What’s more, making short-term predictions about share prices is akin to guesswork.

Opinions are split on ROO’s immediate future. On one hand, Mark Hiley of research firm The Analyst reckons that, despite having fallen by 40%, Deliveroo shares could fall another 40%. This would take them to 140p. That’s a whopping 250p below the share price. To be honest, at 140p, I would definitely have a punt on the ROO share price rebounding.

On the other hand, Deliveroo is growing really, really fast. As I said at the float, this is a growth company for growth investors. Orders in the first quarter of 2021 more than doubled, rising 114% compared to the first quarter of 2020, to exceed 71m. Gross transaction value in January to March was up 130% year-on-year to £1.65bn (versus £715m). If growth were to continue at this breakneck pace, then this could be good news for Deliveroo shares.

Should I buy Deliveroo today?

My family portfolio is mostly focused on FTSE 100 value shares paying decent dividends. But I’d like to diversify — and maybe boost portfolio performance — by adding a few growth stocks. However, what happens to Deliveroo when lockdowns end and consumers return to spending in real life, outdoors? Also, Deliveroo operates in a cut-throat market and faces multiple legal challenges to its employment practices. Then again, how much of this is already baked into these cut-price Deliveroo shares?

At just over 230p, Deliveroo is obviously more attractive to me than at the IPO price of 390p. Nevertheless, I’m going to reject the opportunity to buy today. As an older, more risk-averse investor, Deliveroo shares don’t yet have the right risk/reward profile for me. But I fully understand younger investors with greater risk appetites being willing to back Deliveroo. After all, they are the ones using its fast-growing service the most!

The high-calibre small-cap stock flying under the City’s radar

Adventurous investors like you won’t want to miss out on what could be a truly astonishing opportunity…

You see, over the past three years, this AIM-listed company has been quietly powering ahead… rewarding its shareholders with generous share price growth thanks to a carefully orchestrated ‘buy and build’ strategy.

And with a first-class management team at the helm, a proven, well-executed business model, plus market-leading positions in high-margin, niche products… our analysts believe there’s still plenty more potential growth in the pipeline.

Here’s your chance to discover exactly what has got our Motley Fool UK investment team all hot-under-the-collar about this tiny £350+ million enterprise… inside a specially prepared free investment report.

But here’s the really exciting part… right now, we believe many UK investors have quite simply never heard of this company before!

Click here to claim your copy of this special investment report — and we’ll tell you the name of this Top Small-Cap Stock… free of charge!

Cliffdarcy 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.