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Can Deliveroo’s share price deliver in the long-term?

Deliveroo’s [ROO] share price dropped 30% as its much-hyped market debut failed to get the backing of investors.

Concerns included the stock’s dual-class share structure, profitability, and the IPO’s pricing, which all added up to a less-than-ideal debut — one that has possibly set back the City of London’s aim to lure more tech companies.

Deliveroo had set a target opening market price of 390p, which was at the bottom of their initial range, with an initial opening valuation pegged at £7.6bn, according to The Financial Times. However, by the end of its first day of trading, £2bn had been wiped off the stock’s value. As of 6 April’s close, Deliveroo’s share price stood at 277.85p.


What issues does Deliveroo need to overcome post-IPO?

City pundits have dubbed the inauspicious listing as “Flopperoo”, citing it as an example of an overcooked tech bubble primed to burst, but it's worth looking beyond the hype to Deliveroo’s long-term prospects. After all, many tech companies, including Facebook [FB], have had shaky IPOs before seeing their share prices soar.

One area that Deliveroo will have to do better in is workers’ rights. As reported by the Guardian, this was one of the reasons David Cumming, chief investment officer at Aviva Investors, gave for not investing in Deliveroo.

“A lot of employers could make a massive difference to workers’ lives if they guaranteed working hours or a living wage, and how companies behave is becoming more important,” Cumming told the paper.

"How companies behave is becoming more important" - David Cumming, CIO at Aviva Investors

A growing number of investors — at both an institutional and a retail level — are putting a greater emphasis on responsible investing. Lauren Mason writing in Investment Weekly, points to research from Calastone that shows 84% of equity fund inflows are into ESG-specific products.

While environmental concerns typically dominate ESG coverage, social and governance considerations are also important. February saw the Supreme Court ruling that Uber [UBER] drivers were workers rather than self-employed. Deliveroo has said that if the riders were classed as employees it would create an investment risk, putting pressure on any profitability.

On the governance side, institutional investors voiced concern over Deliveroo’s dual-class share structure, which would give CEO Will Shu (pictured above) greater voting power. Under current rules, this makes it ineligible for inclusion in the FTSE 100, despite having a big enough market cap. Deliveroo’s IPO could potentially make regulators reconsider proposals to loosen regulations aimed at paving the way for multiple share classes.

Deliveroo is also a loss-maker, to such an extent that backer Amazon [AMZN] had to bail it out last year. Despite the significant tailwind the pandemic created for food delivery companies, Deliveroo lost £227.7m on £4.1bn in revenue in 2020. That’s better than the £317m loss seen in 2019 but, as the economy begins to reopen and people return to restaurants, Deliveroo’s losses could widen.


Can Deliveroo grow into its valuation?

Deliveroo’s initial offering may have been mispriced, but it's not all doom and gloom. Bloomberg Intelligence suggests Deliveroo still picked up £1bn, which it can pump back into the business. The company could also expand into online grocery delivery, another growth area in the pandemic.


Deliveroo's estimated gain from IPO

Should Deliveroo be able to continue to increase revenue, then it could potentially grow into its valuation. Ocado [OCDO] could provide a good model for Deliveroo as a delivery company that has managed to grow revenues, along with raising cash from shareholders, even as it has struggled with profitability.

It’s worth noting that the listing comes at a time of rising treasury yields that have put pressure on growth stocks like Deliveroo. After the furore over the listing has died down, investors will be better placed to make a decision on whether Deliveroo is a good or bad investment.

Now that it is a publicly-traded company, Deliveroo’s next milestone will come when it publishes its first set of earning results.

“We have a simple message today: Don’t underestimate Deliveroo,” CFO Adam Miller wrote in an internal memo to staff following the IPO.

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