The Deliveroo (LSE: ROO) share price has struggled to make much progress in bouncing back from its awful IPO earlier in the year. Indeed, the stock is still down 33% from its original offer price of 390p per share!
Today, I’m going to pick out three reasons why I’d continue to be wary of this stock market flop going forward and why I think the Deliveroo share price might still be too high.
Will early holders sell?
One important snippet from Deliveroo’s IPO prospectus was that existing owners would be unable to sell their holdings for a period after the company came to market. For company shareholders, this is 180 days. For directors, it’s a year. This is generally a good thing. It gives retail investors some reassurance that those with significant stakes are staying put.
Yet this was all set in stone before Deliveroo’s share price tumbled. As things stand, backers might not be willing to wait around for sentiment to improve and wish to exit as soon as they can (September). Cautious fund managers may also be unwilling to take the shares off their hands as they’re judged on quarterly performance. This could apply further pressure to Deliveroo’s valuation.
Deliveroo share price’s big issue
Another reason to be wary of the share price is that the firm isn’t profitable. Nor is the company providing updates on when it expects to be profitable.
Obviously, rapid growth is key. However, I can see a few hurdles. For one, Deliveroo’s services will surely only ever be in demand in major cities. Expanding to rural areas isn’t cost-effective. Aside from the health implications, I’m not sure many families can’t afford (nor want) to order takeaway too frequently either.
To expand effectively, Deliveroo may also require regular cash top-ups from institutions. This will dilute private investors and could further impact the share price. Retail investors also have limited input on strategy. Thanks to its ownership model, CEO Will Shu has 20 votes for every share he owns. Standard shares allow just one vote per share for holders.
The great unlock
Now, it doesn’t take a crystal ball to work out that the number of orders could be about to fall. Having been cooped up for so long, it’s understandable that people are looking forward to eating in restaurants and pubs again. Reservations already soared back in May.
All this isn’t lost on Deliveroo. In fact, it’s already said it expects growth rates to “decelerate as lockdowns ease“. The concern, however, is that it doesn’t know how big this deceleration will be.
What’s more, Deliveroo won’t be the only company battling for post-pandemic orders. Rivals Just Eat and Uber Eats want their slice of the pie too. This need to compete will lead to higher costs, which brings me back to my previous concern about profitability.
I could be wrong
Of course, no one knows for sure where the Deliveroo share price will hop next. Original backers may not sell their holdings once lock-up periods have expired. The company may also be successful in taking market share. Demand for takeaways isn’t about to drop off a cliff either.
Nonetheless, I wouldn’t be quick to dismiss these concerns if I were a prospective buyer. I suspect there are far better growth opportunities elsewhere in the market.
Paul Summers 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.