Just a quick thing before I start – make sure you watch Merryn’s new video interview, fresh out this morning.
She talks to Dr Pippa Malmgren about Donald Trump’s next move, the nature of the post-Covid recovery, and the potential for a huge baby boom in the next year or so, not to mention NFTs and the threat posed by digital currencies.
Don’t miss it! You can watch it here.
And now on to today’s big story – Deliveroo’s mega-flop of an IPO.
It’s all about the price
I could start this story with a string of dreadful puns about investors suffering from indigestion. But what with this being April Fool’s day, there are way too many would-be comedians out there this morning.
So let’s just tell it straight: takeaway and grocery delivery app Deliveroo had a shocker of an IPO yesterday. The share price started out at the very bottom end of its range – 390p. And that was the high for the day. It immediately got whacked lower and ended the day trading at 287p, down 26%. It’s fallen a bit further this morning.
Apparently, this is not – as one of its bankers suggested – the worst IPO in UK history. On Twitter, William Wright of the New Financial think tank notes that, based on data since 1999, it in fact, “only ranks 1,765th out of 1,775 IPOs by UK companies in terms of its first-day performance”. So it’s only the 11th-worst IPO in UK history.
Why was it such a flop? The usual scapegoats took their usual share of pelters. As the FT reports, “several of Deliveroo’s advisers, bankers and investors were quick to blame short sellers for the opening plunge”.
I’d treat this excuse with the contempt it deserves. One iron-clad rule of investment is that when short-sellers get blamed for something, it means that someone somewhere is trying to duck responsibility, and they can’t think of any better excuses than “a big boy did it and ran away”. (I’m sure that the poor, maligned short sellers were weeping into their huge piles of money by the end of the day.)
What about the ethical issues? Before the listing, lots of City institutions were declaiming loudly about concerns over workers’ rights and also about the dual share-class structure (whereby the CEO sells most of his shares but keeps most of his votes, leaving the shareholders with no real say in running things).
But the reality of course is that they’d have happily shrugged off both of these issues if the company looked like a solid business at a good price.
Instead, Deliveroo looks like a risky business at a very high price. It doesn’t yet make a profit. It does rely on an employment model that looks open to regulatory challenge. And the big problem with the dual-class structure is that it bars it from the FTSE 100, which means you don’t get support from passive tracker funds piling into it.
On top of that, the timing was bad. The time to sell loss-making wannabe tech companies was last year. Deliveroo’s US rival DoorDash managed to get its IPO away in December last year. It listed at $102 a share, and closed at nearly $190 by the end of the session. It peaked in early February at around $215 a share, and now it’s down to around $130 (still above the IPO price, to be fair).
Have DoorDash’s prospects really changed so radically in the space of four months? Did something happen to the takeaway and grocery market in February? Of course not. It’s just that tech has been falling out of favour because interest rates are showing signs of edging higher. That means the value of today’s money relative to tomorrow’s money is rising. And that in turn makes “build it and they will come” companies less appealing, because the discount rate on dreams has gone up.
So you really didn’t need much reason to avoid it.
What happens next?
There’s a lot of talk about how this is an embarrassment for the London market. But that just seems fairly stupid. Would it have done better if it listed elsewhere at this price, at this particular point in time? I doubt it. Will it put future IPOs off London? Again, it seems doubtful, though it may deter any takeaway services from going public soon.
The obvious question for investors is this: will it bounce from here? If you did buy the shares and had them allocated to you, you can’t do anything yet anyway. Conditional trading doesn’t end until 7 April, at which point the shares can be moved to Isa accounts etc.
On the bright side, the most you could have bought is £1,000-worth of stock. If you did buy, you need to think about why you bought in. For some investors, this will be a useful learning experience. What is your rationale for owning the stock?
If you bought it in the hope that it would jump higher on the first day, then your rationale, I’m afraid to say, is no longer valid. You should use some of the time between now and 7 April to have a look at the company and consider whether you still want to own the shares at the current price.
As for anyone who didn’t invest, I suspect that Deliveroo’s short-term prospects depend more on wider market sentiment to these sorts of stocks. If the “Great Rotation” freezes up (perhaps as fears that lockdown will be lengthened in Europe in particular), then maybe there’ll be a bounce. But I’m more of the school of thought that the rotation is now in progress and that any pause will simply be a pullback in a longer-term trend.
All things considered, if you don’t own it, I struggle to see any value in putting a lot of time and effort into researching whether you should invest or not. There are more interesting sectors and opportunities out there right now – your time would be better spent with them.
What sorts of opportunities? We cover rather a lot of them in MoneyWeek magazine every week. If you’re not already a subscriber, you can get your first six issues – plus a beginner’s guide to bitcoin – absolutely free, right here.
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