The Deliveroo (LSE: ROO) share price IPO’d at 390p. But in its first day of trading, the stock slumped 26% to 287p. Since then, shares in the food delivery company have struggled to push higher. At the time of writing, the stock is dealing at 260p.
Based on this trading activity, it looks to me as if the company was overpriced when it came to market. However, over the past few months, the stock has settled in a range of 250p to 260p, which seems to suggest investors believe this is a more appropriate valuation for the business.
This is quite a positive development because we now have more of an idea of how the rest of the market values the enterprise. Indeed, one of the big problems with IPOs is that the whole process is designed to achieve the best price for the sellers. This means companies can often be overpriced. It appears as if this was the case with the Deliveroo share price.
A more acceptable level
So the company might have been overpriced at the time of its IPO. But recent trading activity suggests the businesses valuation has fallen to a more acceptable level.
While it’s impossible to predict share price action in the short and long term, stock prices should track fundamental business performance, in theory.
Therefore, as the company’s profits and revenues increase, the Deliveroo share price should reflect this growth. With that being the case, I think the answer to the question of whether or not the stock can recover in 2021 depends on its fundamental performance.
The pandemic has been a boon for the business. Stuck at home, consumers have had no choice but to turn to the platform to deliver meals. Some analysts have speculated that demand for the company’s services will fall as the economy reopens. As consumers increasingly eat and drink outside of their homes, the need for delivery services may decline.
If demand does decline, Devlieroo’s sales will slide. However, if sales remain elevated, or continue to expand, the group will have proven its doubters wrong.
The outlook for the Deliveroo share price
This could suggest the company’s fundamentals are improving, which would justify a higher share price. In this optimistic scenario, it’s not unreasonable to say the Deliveroo share price would recover some of its losses in the second half of this year.
However, if sales slide, investors and analysts may have to revisit their forecasts. This development would confirm speculation that the company’s growth last year was a one-off. The stock price might re-adjust lower as a result.
Overall, the answer of whether or not the Deliveroo share price will recover in 2021 depends on the company’s fundamental performance.
Personally, I wouldn’t buy the shares today because I think the firm’s outlook is too uncertain. If it doesn’t live up to expectations, it’s unclear how management would restore growth.
Rupert Hargreaves owns no share 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.