By David Morrison, senior market analyst at Trade Nation
Deliveroo went public this morning with a UK listing and a price target of 390 pence per share, the lower end of expectations. But this still valued the Amazon-backed company at around £7.6 billion, way above its estimated value of £3 billion just four months ago.
But instead of a stampede of investors rushing in and driving the price higher, the stock quickly fell 30%, meaning a paper loss for those retail investors (which include Deliveroo customers and its top drivers) unlucky enough to have been tempted in and paid the IPO price. While the stock subsequently recovered, this is undoubtedly a flop by anyone’s standards.
It’s also a big embarrassment for the London Stock Exchange which was looking forward to its biggest IPO in nearly 10 years, and UK Chancellor of the Exchequer Rishi Sunak, who dubbed it a successful British tech story, and a harbinger of more big tech IPOs to come.
Of course, you can’t judge a company by its first few hours of trading. After all, Facebook had a disastrous launch, and a torrid few months after that. But if an investor can go into the market after a couple of hours and purchase shares 30% cheaper below the IPO price target, then something has gone wrong.
Although heavily touted, the Deliveroo launch was not without controversy. Several big funds including Aviva, Legal & General, M&G and Aberdeen Standard Life shunned the IPO citing concerns over the treatment of the company’s drivers – and example of how ESG (Environmental, Social and Governance) standards are influencing investor behaviour. This undoubtedly had an impact on share take-up.
The question I’m asking is would this have happened in the US? Is the appetite for IPOs considerably stronger there than in the UK? Well, the answer is probably ‘yes’. But maybe a lot of the problem is the difference in how UK investors perceive a company like Deliveroo compared to those in the States.
Deliveroo paints itself as a tech disruptor, just like Uber does. But to many people like myself, Deliveroo is a company with a young workforce dashing around at 8pm on unlit bikes with boxes on their backs in the posher neighbourhoods around London. That doesn’t seem very high tech to me. Unlike Uber that has scalability, Deliveroo probably won’t work outside a big metropolis like London. I can’t imagine swarms of riders in places like Slough, High Wycombe, or Swindon. Also, it has plenty of competition from the likes of Just Eat and Uber Eats. Finally, it doesn’t make money. While that’s also been the case for other tech companies, such as Uber and Amazon, what will Deliveroo’s future be like once lockdown ends?
Of course, there is another angle. Even if it doesn’t look like it in public, Deliveroo really is a tech company. Just look at the data it will have collected concerning our social groupings and eating habits during the pandemic. And the company is perfectly placed to measure how that will change once the pandemic is over. That data is valuable, and that’s what investors eventually twigged with regards to Facebook.
So, a disappointing launch and a bit embarrassing all round. But overall, I doubt it will really damage The City as a place to do business. And who knows, those early investors could well end up booking a profit – if they hold on long enough.