Should I Invest in Deliveroo Shares?

April 13, 2021 13:43 UTC

The Deliveroo IPO was an eagerly anticipated event for the London Stock Exchange, representing its biggest public listing so far this year. However, Deliveroo experienced one of the worst IPOs in recent history.

In this article, we will take a look at the company, examine why the IPO was unsuccessful and evaluate whether buying Deliveroo shares is a good idea.

What Is Deliveroo?

Deliveroo is an online food delivery company which was founded in England in 2013. As well as operating throughout the United Kingdom, it also operates in several EU nations, Australia, Singapore, Hong Kong, the United Arab Emirates and Kuwait.

Customers can create orders through the Deliveroo website or mobile phone app from restaurants which are in partnership with the delivery company. Orders are then delivered to the customers by bicycle or motorcycle couriers.

Deliveroo earns revenue by charging the restaurants a commission for the order as well as charging the customers a fee for the service.

How Did the Deliveroo IPO Perform?

After the first day successes of other tech Initial Public Offerings (IPOs) recently, such as DoorDash and Airbnb, some may have predicted a similar trajectory for the Deliveroo IPO.

However, this was far from the case. After being initially priced at 390 GBX, Deliveroo’s share price fell almost 30% on its first day on the London Stock Exchange, closing the session at around 287 GBX per share.

This fall wiped £2 billion off the value of £7.6 billion at which Deliveroo had gone public that morning.

All this despite Goldman Sachs reportedly buying £75m worth of shares, in a vain attempt to stabilise the share price.

Depicted: TradingView - Deliveroo Price Chart. Date Range: 31 March 2021 - 13 April 2021. Date Captured: 13 April 2021. Past performance is not necessarily an indication of future performance. 

Why Has the Deliveroo Share Price Fallen? 

Although there was considerable anticipation in the run up to the Deliveroo IPO, there were also concerns raised publicly by high profile investors about the prospect of purchasing Deliveroo shares.

We can identify two key reasons behind a lack of support for Deliveroo shares which led to a drop in price; the company’s financial records and the employment status of their workers.

Financial Records

After eight years, Deliveroo has yet to become a profitable company, making losses of £230.7 million, £318.1 million and £223.1 million in 2018, 2019 and 2020 respectively, according to their IPO prospectus.

Of particular concern to potential investors was the fact that in 2020, conditions seemed ideal for Deliveroo: the lockdown meant no competition from restaurants, skyrocketing demand for food home-delivery and an increase in casual workers for the company. 

Things have been as good as it gets for Deliveroo during the pandemic. And yet, the company failed to make a profit. This led many to ask the question that, if Deliveroo was unable to make profit in a year where circumstances for their particular business model were ideal, would they ever?

Workers’ Rights

The second factor behind a fall in Deliveroo share price is the employment status and rights of their workers. Deliveroo treats their riders as independent contractors, which means that the company is not obliged to pay them statutory minimum wage or to provide them with sick or holiday pay.

There is increasing public sentiment that Deliveroo should be treating their workers as employees and providing them with the aforementioned benefits which come with employment. 

Increasingly, investors’ decisions are being driven by ESG (Environmental, Social and Governance) criteria. Simply put, many investors have been dissuaded from buying Deliveroo shares due to concerns over their workers’ rights.

Deliveroo highlighted in their IPO prospectus that their business “would be adversely affected if our rider model or approach to rider status … were successfully challenged or if changes in law require us to reclassify our riders as employees”. It goes on to say that they are in fact currently engaged in legal proceedings regarding the employment status of their workers in a number of the countries where they operate.

This issue of workers’ rights has been strengthened by February’s Supreme Court ruling that Uber had been wrongly classifying its drivers’ employment status. This ruling led the company to pay its drivers a guaranteed minimum wage, holiday pay and provide pension benefits. Although, interestingly, this ruling did not extend to Uber Eats, the food delivery arm of the company.

ESG concerns aside, Deliveroo is yet to make a profit. If they were forced to reclassify their riders as employees, this would have a large negative impact on their finances and further  delay their road to profitability.

Who Are Deliveroo’s Biggest Investors?

Whilst there was much attention in the press given to fund managers advising they would not be adding Deliveroo stock to their portfolios, less attention was paid to the high profile investors who already held significant stakes in the company from pre-IPO funding rounds.

Most notably, US tech giant Amazon holds a significant stake in the company. Although they parted with around 23.3 million shares in the IPO, Amazon still holds 11.5% of total Deliveroo shares outstanding.

Index Ventures, DST Global and Greenoaks Capital are other prominent shareholders who each sold around 15 million shares at the IPO, however, they still retain 7.5%, 7.4% and 6.6% of outstanding Deliveroo shares respectively.

Rowe Price and Fidelity Management, who did not sell any shares in the Deliveroo IPO, also hold considerable stakes, accounting for 6.5% and 5.9% respectively of total shares outstanding.

Should I Buy Deliveroo Shares?

At the end of the day, this is a question that needs to be answered by each reader, depending on their investing goals and profile.

We have focused above on one of the major roadblocks towards Deliveroo’s future success, workers’ rights. Another problem is the high level of competition they face in the food delivery industry. In the UK alone, Deliveroo competes directly with Just Eat and Uber Eats, both of which account for a large portion of the industry.

However, there are positives to take away as well. In just eight years, Deliveroo founder Will Shu has grown a business from nothing into an international enterprise, operating in 12 different countries with 115,000 food merchants and over 100,000 riders. 

It should also be noted that despite the company’s losses, its sales growth is impressive, with total revenue rising from £476.2 million in 2018 to £1.19 billion in 2020.

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Roberto Rivero
Roberto Rivero Financial Writer, Admirals, London

Roberto spent 11 years designing trading and decision-making systems for traders and fund managers and a further 13 years at S&P, working with professional investors. He has a BSc in Economics and an MBA and has been an active investor since the mid-1990s