Loss-making Deliveroo needs extra sauce to tempt investors

Deliveroo, the unprofitable takeaway-food platform, is to float next month. Sales soared last year, but will the momentum now ebb? Matthew Partridge reports

Deliveroo food
Deliveroo's sales jumped by 54% last year
(Image credit: © Mikael Buck / Deliveroo)

Get set for “the biggest market debut in Britain for three years”, says Sky News. The online food-delivery platform Deliveroo is to float on the London Stock Exchange next month. The process could result in it being valued as much as £7.5bn.

In an offer branded “great food with a side of shares”, £50m of the shares in the “blockbuster” initial public offering (IPO) have been reserved for customers, who will be able to apply for up to £1,000 of them. However, priority will be given to long-standing users if the flotation is oversubscribed.

Deliveroo deserves “top marks” for inviting customers to buy a few shares in the company’s flotation, especially since “few firms bother to include retail investors in their IPOs these days”, says Nils Pratley in The Guardian. Not only is it a “fairer way to proceed”, but it will also help them “secure a crew of like-minded investors”. However, those investors may need to be very patient, since even a £5bn valuation, let alone the higher figures that some experts are talking about, relies on investors believing that the company, which is still loss-making overall, has “decades of growth ahead”.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

A lockdown boost

There’s no doubt that the lockdown has been good for business, as “new customers and higher order frequency” have lifted revenue by 54% to £1.2bn last year, says Karen Kwok on Breakingviews. If you value it on a similar price-to-sales multiple as rivals Just Eat or Takeaway.com, the company could be “worth $10bn including debt”. Still, Deliveroo “may need to add extra sauce to win over new shareholders”. There are growing concerns that sales could subside as customers “flock back to restaurants”, especially in the UK and Ireland, which account for around half Deliveroo’s revenue.

Already shares in American food delivery firm DoorDash have started to slide back after a “blistering debut” due to fears about what will happen after a “return to restaurants”, says James Titcomb in The Daily Telegraph. What’s more, even if sales continue to grow, there is no guarantee that costs won’t grow even faster.

While Deliveroo makes around 88p in gross profit (earnings minus the cost of making deliveries, such as drivers’ fees) from each £10 order, changes to employment rules around the “gig economy” may wipe this out. The freelance status of delivery workers is “being challenged in several countries”, with the UK Supreme Court recently ruling against Uber.

Still, even if Deliveroo is overvalued, you can’t blame its owners for cashing in while investors are still “hungry” for growth stories, says Patrick Hosking in The Times. Already, conditions are becoming “less benign for high-growth shares” as long-term interest rates start to rise. As a result, the share prices of growth firms have started to tumble, with Tesla down by nearly a third since January. Given the roster of “fast-growing disruptors” queueing to list in London, tech firms that delay flotation could be left out in the “undignified scramble” for investor’s money.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri