Is Deliveroo a good investment?

By Patricia Miller

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The recent Deliveroo IPO has drawn significant market attention, as potential investors and traders weigh the power of the Deliveroo brand. Should you invest?

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The recent Deliveroo IPO has drawn significant market attention, as potential investors and traders weigh the power of the Deliveroo brand against a legacy of losses. Deliveroo is a food delivery app and website that provides a delivery service between restaurants, supermarkets and customers.

Companies that sign up to Deliveroo can expand into food delivery quickly and without the need of employing a large number of people to manage the logistics of deliveries. Restaurants or shops and supermarkets are added to the app where customers can see which ones deliver to their area, place an order and make payment all in one place, a service that has seen a boost during the covid-19 lockdowns.

Deliveroo’s bumper year becomes especially clear when one looks at its gross transaction value (“GTV”) for 2020, which jumped 64% to £4.1 billion from £2.5 billion in 2019. GTV measures the total amount of transactions processed on the company’s platform.

Fundamentals of Deliveroo stock

Deliveroo has blossomed amid the pandemic, with lockdowns forcing everyone inside and preventing people from dining in restaurants, making ordering-in the only way to avoid having to cook.

As a result, the company now has more than 115,000 restaurants, takeaways, and grocery stores on its platform, with 100,000 riders across 800 locations in 12 markets. It serves an impressive six million customers around the world.

The company had a particular edge over some of the competition during lockdown because it operates its own fleet of drivers, meaning dine-in only chains didn’t have to take on all the logistics of becoming a take-away business.

Debuting on 31st March 2021, Deliveroo’s IPO was expected to perform well and draw massive market attention, but failed to live up to expectations.

What is the bull case for Deliveroo?

Reputation and brand awareness count for a lot these days, and most people have at least heard of Deliveroo or recognise the logo even if they’ve never used their services themselves. This is a great advantage for Deliveroo stock as it is easier to draw in investors whey they have at least heard of a company and have an idea of how the business works.

When the IPO debuted on 31st March 2021, Deliveroo said it intended to raise £1 billion from its London IPO, with some existing shareholders also planning to sell shares.

Among Deliveroo’s investors are tech giant Amazon (NASDAQ: AMZN), as well as venture capital firms Accel Partners and Index Ventures. Financial services firm Fidelity Management & Research, and investment management business T. Rowe Price (NASDAQ: TROW).

With such prestigious backers, and a particularly powerful brand, Deliveroo was expected to draw significant interest in its debut. The stock’s opening price was 390p per share and by close of trading on the same day it had dropped by around 30% to 282p. Within a few weeks the shares dropped even further and were trading at close to 230p.

But a few months on and the shares have increased significantly and are currently trading at close to 330p, a growth that is encouraging. The initial fall has been attributed to the stock being open for trading only to institutional investors, but is now open to retail investors. A move that will no doubt have contributed to the increasing share price.

What is the bear case for Deliveroo?

The initial disappointing start of the IPO appears to have made investors wary, this combined with doubts over whether the company can continue to grow in a post-pandemic world are two factors to think about when considering whether or not to invest in Deliveroo.

As lockdown restrictions are eased and people can mix freely again, it seems likely that restaurants will be packed with people holding belated birthday parties and anniversaries, or even just celebrating the chance to see friends at last. It’s hard to predict if restaurants will want to stick with Deliveroo long-term.

Likewise, grocery chains listing on Deliveroo might also depart, with people free to visit their local supermarket or shop without any safety concerns and with confidence in returning to normality growing as more and more people receive their vaccinations.

Deliveroo has also suffered a legacy of losses and while losses don’t always spell trouble for growing companies, it would be remiss not to consider them when deciding if you should invest in Deliveroo stock.

Deliveroo’s underlying losses in 2020 narrowed to £223.7 million from £317.3 million in 2019. However, some have drawn attention to the fact that the loss came despite a 54% net revenue rise to £1.2 billion.

It is notable that Deliveroo will have two classes of shares on admission, A and B, with chief executive Will Shu to hold all B shares. A shares entitle their holders to one vote each, while just one of Shu’s B shares grants him 20 votes.

B shares will not be offered in the IPO and will not list or trade on any stock exchange until three years after the float. They will then convert to A shares. This dual-class structure, which lets Shu keep control over the company, means the stock must remain on the standard section of the London Stock Exchange and will not be able to join benchmark indexes like the FTSE 100.

Should I invest in Deliveroo stock?

The Deliveroo IPO is still in its infancy and having only been available for a few months along with the country slowly opening up again makes it difficult to determine where Deliveroo as a company could be in 6 months, 12 months and beyond.

If the demand for eating in and food delivery falls, it could be expected that the share price would follow but in a world where convenience and the adoption of online shopping and home delivery are now ingrained in our everyday lives, the demand for services such as Deliveroo could well remain high and continue to grow.

The legacy losses the company has made may also be a concern for investors, but Amazon.com is a well-known example of a company that front-loaded losses for years to ensure it could expand as much as possible before finally turning over the epic profits we see today.

However, the strategy doesn’t work for every firm in every industry. Post enough losses, and even the most steadfast investor could lose faith.

Overall, as a sentiment play, Deliveroo’s appeal seems fairly straightforward, but its potential as a genuine investment is on shakier ground.

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Topics:
Internet and Direct Marketing Retail
Industries:
Consumer Discretionary
Companies:
Deliveroo

Author: Patricia Miller

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Patricia Miller does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Patricia Miller has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.