Should you invest in the Deliveroo IPO?

Food delivery company Deliveroo is listing on the stockmarket in an initial public offering. Should you buy in? And if so, how do you go about it? John Stepek explains.

One complaint that we’ve had for a while at MoneyWeek is the dearth of new stockmarket listings, particularly in London – the hottest companies have been kept private for ever longer periods, not needing the hassle of going public. 

That’s not great, because it locks ordinary investors out of great chunks of market capitalism, and further increases the general sense that the financial system is not open to all.

But it appears that the long lull is over. Recent high-profile listings include The Hut Group and Moonpig. Now we have another well-known name hitting the market – takeaway group Deliveroo. But should you buy in? And if you want to, how do you go about it?

Why I’m not keen on Deliveroo

It’s nice to see that companies are coming to market again. A stockmarket isn’t a healthy place if it’s just the same old names being cycled over and over. And it’s not great for shareholder capitalism to deny small investors access to the most interesting companies by keeping them off market and in the hands of private equity, for example.

That said, a sudden surge of listings can be quite a toppy signal. Most companies get to choose their moments when they list. And as they’re the sellers, they try to go public when the clamour from buyers is loudest. So while it’s great to get new blood into the stockmarket, it’s a good idea to be cautious in the early days. Even a good company might be easier to get on the cheap after it’s been on the market for a while. So while we’d welcome the new enthusiasm for equity listings, just remember that it’s not a reason to jettison your natural scepticism.

That takes us to Deliveroo. Even if you’ve never ordered a takeaway via them, you’ve no doubt seen a livery-bedecked figure carrying a big blue box cycling down a road near you. That’s basically how the (still loss-making) company makes its money – it allows restaurants to outsource their takeaway deliveries.

Look I’ve got to be honest with you right away – Deliveroo isn’t a stock I would buy. Before I start on why not, I’ll warn you in advance that I have a tendency to be overly sceptical of tech and “hot” stocks in any case. So I’m probably not the best person to ask. But here are a few of the reasons I’d be wary. 

Firstly, these “platform” companies have benefited as much from regulatory arbitrage as they have from tech. In other words, they’ve found areas where the rules are in grey areas due to the involvement of the internet, and then pushed their boundaries. However, they’ve now been around long enough though that the boundaries are pushing back. 

For example, Uber just lost a big case in Britain about whether or not its drivers are employees. Turns out that Uber drivers (here in the UK at least), are considered to be workers. And so that means they should get minimum wage, holiday pay, and all the rest of it. That potentially makes the company a lot more expensive to run and therefore even further away from consistent profitability. 

The “gig” economy won’t collapse by any means – it’s too useful for that to happen. But it will be more closely regulated. Given that most of these companies already struggle to make a profit, this headwind from the authorities is not good news.

Secondly – and this is an even more short-term concern – as Russ Mould of AJ Bell points out, 2020 was almost uniquely favourable for Deliveroo. No one could eat out. As a result, it saw transaction numbers shoot up by 64% to £4.1bn in 2020. 

The global population is collectively going to be released into the wild this year. Will we still have takeaways? Yes. Will we have as many as last year? No. Will we probably have fewer this year, because given the choice, we’d rather go out? More than likely. So arguably, the company is listing on the back of the most favourable conditions it can expect for a while. Is now really the time to buy?

Thirdly – and it’s somewhat related to the first point – if Deliveroo is considered a tech company and a bit of a "jam tomorrow" company as well, then it’s going public just as its entire sector is moving out of favour due to the great rotation. You just have to look at what’s happened to DoorDash – a US company in the same sector that went public in December. Its share price peaked virtually alongside Tesla’s in early February, and since then has dived by more than 35%.

How to invest in Deliveroo if you want to ignore me

One thing I am glad of is to see that ordinary investors – the likes of you and me – are getting a look in on this particular listing. That said, it’s in a slightly quirky and limited way. You can’t buy the shares through your broker; you have to be a Deliveroo customer. If that’s the case, then you can register your interest via Deliveroo’s app to buy up to £1,000-worth of shares. You’ll then be able to transfer these to your brokerage account.

Also note that if the issue is oversubscribed, the most loyal customers will be prioritised. So if your takeaway habit has been less heavy than mine during lockdown, you might not get in there, even if you do register. There’s £50m worth going spare.

Anyway, if you disagree with my analysis – or you just want to take a punt on there being enough excitement for you to “flip” the shares quickly once they’ve listed – you’d better get on the Deliveroo app.

We’ll have more on the progress of Deliveroo and other IPOs in upcoming issues of MoneyWeek. Get your first six issues, plus a guide to bitcoin for beginners, absolutely free when you sign up now.

Recommended

Three ways to avoid a big Deliveroo-style flop
UK stockmarkets

Three ways to avoid a big Deliveroo-style flop

Deliveroo's IPO – the most exciting new stockmarket flotation for a generation – turned out to be a big flop. It needn’t have been, says Matthew Lynn.
11 Apr 2021
What the Deliveroo IPO can teach us about investing
Investment strategy

What the Deliveroo IPO can teach us about investing

Losing money on an investment is painful, says John Stepek, but it can force us to look at our process in a way that making money doesn’t.
8 Apr 2021
Deliveroo’s IPO flop shows which way the market is going
Stockmarkets

Deliveroo’s IPO flop shows which way the market is going

Deliveroo’s disastrous IPO is a good example of how investors are looking away from loss-making growth stocks and more towards companies that will pro…
6 Apr 2021
Why was Deliveroo’s IPO such a disaster? And what should investors do now?
UK stockmarkets

Why was Deliveroo’s IPO such a disaster? And what should investors do now?

Takeaway delivery service Deliveroo had a stinker of an IPO – the share price immediately dropped by around a third. John Stepek looks at what went wr…
1 Apr 2021

Most Popular

China owns a lot more gold than it’s letting on – and here’s why
Gold

China owns a lot more gold than it’s letting on – and here’s why

In a world awash with money-printing, a currency backed by gold would have great credibility. And China – with designs on the yuan becoming the world’…
21 Apr 2021
“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
House prices in the UK are still surging – here’s why it’ll probably continue
Property

House prices in the UK are still surging – here’s why it’ll probably continue

The latest UK house price data shows no letup in the country’s booming property market, with the biggest yearly rise since 2014. And there’s no end in…
22 Apr 2021