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Deliveroo shares are down 42% since the IPO. Is it becoming a bargain buy?

Image: Deliveroo

After a lot of hype around Deliveroo (LSE:ROO) IPO at the start of the month, the share price initially fell. After the flurry of activity as a stock goes public, the share price usually settles down after a couple of weeks. This is usually when I check back in and see how it’s trading. Deliveroo shares aren’t too popular and the price is continuing to fall, albeit with lower volatility. They currently trade just below 230p, from the IPO level of 390p. Does this represent a bargain buy?

Reasons for liking Deliveroo shares

I actually bought Deliveroo shares via the IPO, so have skin in the game already at 390p. However, I’m considering buying again at this lower price to average my price down. After all, I believed in the stock at 390p, so a 42% discount is good enough for me to consider buying more. 

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I personally think that Deliveroo shares look undervalued at current levels. There are a few different reasons behind this. One simple reason is that the experts within the investment banks that priced the IPO suggested the fair value was 390p. These analysts are much smarter than I am, and so I trust their call on what the business is worth.

If they concluded a value was valid around 390p only a month ago, then surely 230p represents an undervaluation and potential bargain?

Aside from this, I also think Deliveroo shares look cheap when considering the outlook for growth. Currently, the company is only operating in 12 countries. Within just these markets, Q1 results showed 71m orders placed, accounting for trade of £1.65bn. This was growth of 130% versus a year earlier. 

I do get the argument that some of this surge is due to lockdown. But in reality, takeaway food isn’t a new concept. I ordered takeaways before lockdown, and wouldn’t say my ordering has increased substantially during the pandemic. So even if a few percent of the growth is lockdown-driven, I still think there is a lot of revenue that will be retained post-lockdown.

Growth potential but also risks

The final reason I think Deliveroo shares are undervalued right now is the untapped markets that could be entered. At the moment the company mostly focuses on Europe, being present in the UK, Spain, Italy, the Netherlands and more. There is some coverage in Asia and the Middle East, but not a great deal. So I think over time that there are incredible potential revenue streams to be tapped, which the share price is not accounting for.

There are risks to my overall argument though. My interpretation of lockdown ordering could be wrong, and revenue could falter with restaurants now back open. Trying to make accurate forecasts for the year ahead is exceptionally difficult. Another risk is the potential legal issues surrounding Deliveroo riders, and what rights they are entitled to.

Overall, I’m going to keep an eye on Deliveroo shares for the next couple of weeks to look to buy again. Psychologically, I’d like to aim for 195p which would represent half the IPO price, but am happy to settle for 200p and a little over that. 

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jonathansmith1 owns shares in Deliveroo. 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.

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