Shares in Deliveroo got off to a horrible start on the market, declining 23% in early trade to £2.95 after pricing at £3.90. It’s a very big early move lower and there will be chatter about what this says about the broader market, investor appetite for listings, the state of the UK economy etc, So what does it mean?
Deliveroo’s price isn’t quite as tasty as it was hoping for, coming in at the lowest end of an already narrowed range. This isn’t hugely surprising given the substantial background noise surrounding the company. The biggest concern is regulation around worker rights. The flexible employee model of Deliveroo’s riders is a huge pillar of the group’s plans for success.
If forced to offer more traditional employee benefits, like company pension contributions, Deliveroo’s already thin margins would struggle to climb, and the road to profitability would look very tough indeed. Throw in the recent developments at Uber, and general market volatility, and the net effect is one of increased anxiety. Sadly for the group, anxiety doesn’t tend to inflate share prices.
“Firstly, I’m slightly surprised there is not more of a stabilisation effort here,” said Neil Wilson, Chief Markets Analyst at Markets.com. “It reflects the cautious approach big funds have shown to the stock amid concerns about working practices and governance. A lot of the big UK funds are not on side, which was failure number one. Will Shu could have avoided that by going for a premium listing and eschewing the tech stock desire for a dual-class structure that leaves power with the founder.”
Old City habits die hard, despite what the FCA wants to do. There could be implications for the plans by the government and Lord Hill to loosen listing rules – but probably not material. If anything it might make some want to get change faster so these kind of tech stocks can be indexed – it hardly shows off London as the place to list a tech stock.
“Retail may also have been put off by some of the negative chatter on social media and in the press – the narrative has been negative really since Deliveroo came out with the IPO,” Wilson observes. “Chiefly though it reflects the fact that even pricing the IPO at the bottom of the range, Deliveroo was demanding too high a price tag for a loss-making delivery platform in a very competitive space with a questionable path to profitability. The books were covered, it was just plain mis-priced.”
Deliveroo is yet to turn a profit, which makes it very difficult to value on a traditional basis. But a market cap of £7.6bn means the company’s worth 6.4 times last year’s revenue, which is some way above rival Just Eat’s 4.8 times, despite the lower price. That means there’s pressure for Deliveroo to deliver the goods, or its share price will be in the firing line.
“Some of the excitement is justified,” says Sophie Lund-Yates, an equity analyst with Hargreaves Lansdown. “Deliveroo has been seriously buoyed by lockdowns, and as restrictions ease, we could see a permanent increase in demand for delivered food. This is one of Deliveroo’s strengths – it offers higher quality restaurant options than some peers, which, coupled with its personalised app content and hyper-localised delivery approach, could hold it in better stead. The cash hoard from the IPO will be used to fund expansion too, particularly in areas like its delivery-only ‘dark’ kitchens, which offer restaurants a way to expand without having to invest lots of cash. It could also be used to pay for acquisitions. All in, Deliveroo should have decent firepower to chase growth.”
The pandemic has offered a structural growth opportunity, but it’s worth asking if lockdowns mean things are as good as they will ever be for a takeaway service. The longer-term outlook depends on how demand holds up in a post-pandemic world, and if that road to profitability looks any clearer.
Deliveroo customers were able to register their interest in the IPO on the Deliveroo App until 30th March. The retail offer is being administered through PrimaryBid. Prospective investors are able to invest up to £1,000, although this can be scaled back if there’s lots of demand.
What is unconditional/conditional trading?
When a stock lists for the first time, there is a period when trades made are conditional. During this time until unconditional trading starts, the company can cancel the IPO and void any trades made. If this were to happen, any money would be returned to investors to the account where they purchased the shares.
During conditional trading it’s not possible to transfer shares for settlement reasons. It’s also not possible to hold or purchase shares in an ISA or SIPP due to HMRC rules.