Does Deliveroo share price weakness mean it’s time to buy?

The Deliveroo share price has fallen by a third since flotation. Does that make it an unmissable bargain, or a risk to be avoided?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Deliveroo (LSE: ROO) flotation in March was keenly anticipated. Home deliveries were a big thing, and getting bigger. Now, a cynic might suggest that an IPO is merely an opportunity for private stockholders to cash in their assets. In an attempt to reassure potential investors and provide a bit of early confidence in the Deliveroo share price, the company attached some lock-in conditions.

The deal prohibits existing holders from selling for at least 180 days, with that horizon expanded to a full year for company directors. I applaud that, but it could come back to bite investors. I’ll get back to that shortly. But first, I’ll remind us how the Deliveroo flotation went.

It was a flop. By 23 April, the Deliveroo share price had fallen to 224p. That’s a 43% loss on the initial offer price of 390p. Is this a suitable time for me to say again that I never buy at IPO? Companies come to market to benefit their existing owners, not to provide me with a bargain buy. So they’ll try to set the timing and the price to make maximum gains for themselves.

There’s obviously nothing wrong with that, but I always remind myself of it whenever I’m tempted to think “Ooh, they’re letting me in on a good thing cheap, so maybe I should fill my boots.

Deliveroo share price still down

At 262p as I write, the Deliveroo share price has recovered a bit. But we’re still looking at a 33% fall since flotation. Still, after a couple of rocky months, the shares appear to be stabilising. That might be a good thing, as it suggests the market has found a valuation it’s happy with.

But for me, there’s one main reason why I can’t share that apparent confidence right now. It’s because I really don’t know how to estimate a fair value for the stock, and I won’t have any real clue until it turns profitable. Oh yes, Deliveroo hasn’t made any profit yet.

Deliveroo’s most recent trading update revealed a 130% year-on-year rise in gross transaction value. That’s impressive, but that gain has clearly been boosted by the pandemic. How things go now that lockdown is over and the end of coronavirus restrictions is approaching is a big unknown. And I wouldn’t buy a stock until I see the company in action during normal times.

Will the lock-in bite?

Anyway, what of the lock-in thing that I suggested could be something of a double-edged sword? Fellow Motley Fool writer Paul Summers explained it well. In short, a whole bunch of pre-IPO owners will be free to sell their shares and pocket their profits come September. If they do, that could put some downward pressure on the Deliveroo share price. 

But here’s where I find the whole thing a bit frustrating. I do see a pretty good chance that Deliveroo will go on to reward investors very well in the coming years. And I often look back on successful growth stocks and think what might have been had I had the courage to get in earlier. It could happen with Deliveroo. But there’s just too much uncertainty to suit my conservative approach to risk these days.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft 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.

More on Investing Articles

Group of young friends toasting each other with beers in a pub
Investing Articles

Is the Diageo share price coiled to rebound?

Christopher Ruane explains why he remains bullish about the long-term outlook for the Diageo share price and would happily invest…

Read more »

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Investing Articles

How I could make a 10% yield for high passive income a reality

Jon Smith explains how he can target high passive income from top-yielding stocks, including one specific example he'd consider.

Read more »

Investing Articles

I’d buy 1,784 shares of this FTSE 100 stock to target £350 of monthly passive income

Muhammad Cheema takes a look at how British American Tobacco shares, with a dividend yield of 10.1%, can generate a…

Read more »

White female supervisor working at an oil rig
Investing Articles

1 ex-FTSE 100 stock that I think will get promoted soon

Jon Smith flags up an energy stock that used to be in the FTSE 100 and currently has strong momentum…

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

With an 8% dividend yield, I think this undervalued FTSE stock is a no-brainer buy

With an impressive yield and good track record of payments, Mark David Hartley is considering adding this promising FTSE share…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,500 in savings? Here’s how I’d try to turn that into £1,809 a month of passive income

Investing a relatively small amount into high-yielding stocks and reinvesting the dividends paid can generate significant passive income over time.

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Dividend star Legal & General’s share price is still marked down, so should I buy more?

Legal & General’s share price looks very undervalued against its peers. But it pays an 8%+ dividend yield, and has…

Read more »

Investing Articles

Dividend shares: 1 FTSE 100 stock to consider buying for chunky shareholder income

This company’s ‘clean’ dividend record looks attractive to me and I’d consider buying some of the shares to hold long…

Read more »