£2bn wiped from Deliveroo in dismal market debut

Will Shu: next phase of our journey

Food delivery company Deliveroo served up a costly stock market debut for investors who saw £2 billion wiped from the company’s value.

Shares were valued at 390p before the market opened and immediately plunged, ending the day at 287.45p, a fall of 26%.

The collapse in value left analysts questioning the pre-float hype and why it was given such a high rating, given that it has yet to make a profit.

Big institutional investors such as Aberdeen Standard Investments, Legal & General and Aviva Investors had shunned the issue which was seen as a major vote of confidence in London when the company chose it over other exchanges.

Just hours before dealings began it was announced the company would be priced at the bottom of its anticipated range – about £7.6 billion, against a top price of £8.8bn.

Shares opened at 331p

Deliveroo shares plunged at the open and never recovered... closing at 287.45p

But even this proved too pricey for investors who quickly offloaded the stock amid growing concern that if the firm is forced to hike the pay of its ‘gig’ workers it will further delay its chances of making a profit.

Russ Mould, investment director at AJ Bell, said: “Initially there was a lot of fanfare about the Amazon-backed company making its shares available to the public, including the ability for customers to buy stock in the IPO offer.

Market sentiment may have caused a drag on the shares of Scottish food delivery firm Parsley Box which was also making its debut. Shares fell from a pre-opening price on AIM of 200p to close at 185p.

“Sadly, the narrative took a turn for the worst when multiple fund managers came out and said they wouldn’t back the business due to concerns about working practices.

“This is likely to have spooked a lot of people who applied for shares in the IPO offer, meaning they are racing to dump them.

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“The fact Deliveroo’s shares were priced at the bottom of the range it had previously set out would suggest institutional investors were only prepared to buy stock if they got them at a discount.

“With Deliveroo, one must question if the knee-jerk reaction we saw at the market open is simply a short-term issue and if investors who like the long-term growth opportunity will flock to buy stock at the even cheaper price, given how the shares have fallen more than 20% on their market debut.

“There are multiple ways of looking at the business. Bulls will say the pandemic has made online food ordering part of everyday life and this trend will remain intact once life returns to normal. Bears will say it is a highly competitive space, Deliveroo doesn’t make any money and that takeaway ordering volumes will ease once the pandemic ends.

“Fast growth jam tomorrow shares are no longer in fashion as investors now prefer lowly-valued stocks that offer jam today. That meant Deliveroo was already fighting a headwind as soon as it hit the stock market.”

Danni Hewson, financial analyst at AJ Bell, added: “There is no happy ending to what, so far, is a cautionary tale for some investors. But will that tale have a sting at the end of it?

“Deliveroo is not the first company to experience a rocky start. Uber stocks fell more than 7% on its debut but, if you’d kept your nerve, you’d be up 20% today. 

“Facebook had a torrid year or so as a listed business but if you’d hung on from those initial lows your investment would be up by more than 10-fold today.”

Professor John Colley, associate dean of Warwick Business School, said: “It is little surprise that investors’ appetite is limited for the Deliveroo IPO. It is a narrow margin loss-maker that is likely to face higher costs due to workers’ rights across Europe.

“There are also concerns as to whether this type of business model can ever return much profit. It would have to deliver a lot of meals at high margins of which there is no sign yet.

“Another major issue may well be the governance concerns relating to founder shares voting power. In the UK investing institutes are more concentrated and are used to having a say in changing management if a business is badly run. So being lumbered with a founder they can’t shift however bad the performance will not go well.

“A number of potentially very large investors decided to sit this one out. Those who invested for the price ‘pop’ have paid the price in losses. This does not augur well for future tech or gig economy launches in the UK. Nor indeed SPACs which again are likely to be seen as poor value and high risk by late investors in the UK.”

CMC Markets chief market analyst Michael Hewson said even after cutting the price, many investors believed it was too expensive, with no clear route to profitability.

‘Today’s IPO is likely to be a decent indicator of how much investor enthusiasm there is for a company that has seen initial enthusiasm wane and where we appear to be starting to get far greater scrutiny of profitability, cash flow and growth prospects, as we start to look ahead to an economic reopening,’ he said.

Will Shu, founder and chief executive, said: “I am very proud that Deliveroo is going public in London, our home.

“As we reach this milestone I want to thank everyone who has helped to build Deliveroo into the company it is today, in particular our restaurants and grocers, riders and customers.

“In this next phase of our journey as a public company we will continue to invest in the innovations that help restaurants and grocers to grow their businesses, to bring customers more choice than ever before, and to provide riders with more work.

“Our aim is to build the definitive online food company and we’re very excited about the future ahead.”