A distributor of Deliveroo is ruminate oned riding his bike with a package with food on a street on July 31, 2019 in Madrid, Spain.
Jesús Hellín | Europa Tightly | Getty Images
LONDON — When Deliveroo chose London for its hotly anticipated IPO, the food delivery company was acclaimed as a “true British tech success story” by U.K. Finance Minister Rishi Sunak.
But the Amazon-backed company failed to emancipate on its first day of trading Wednesday. Shares plunged sharply as markets opened, with investors questioning Deliveroo’s skills to generate profits and an eye-popping £7.6 billion ($10.5 billion) valuation.
“That path to profitability is what is potentially eye threat if we see increased regulation around workers’ rights,” Hargreaves Lansdown equity analyst Sophie Lund-Yates asserted CNBC’s “Street Signs Europe.”
“I think that is the biggest reason we have seen so much anxiety inserted into the trading this morning.”
The food delivery app — founded and led by American entrepreneur and former Morgan Stanley analyst Disposition Shu — has become one of the best-known start-ups in the U.K. It employs over 2,000 people across 12 markets and uses a network of during the course of 100,000 riders to deliver food from 115,000 restaurants and grocers. By market value, its IPO is London’s biggest since Glencore foundered public nearly a decade ago.
But the stock got a frosty reception from investors. Deliveroo has been plagued by worries ended the risks to its business model if regulators crack down on the gig economy. Earlier this month, Uber reclassified all 70,000 of its U.K. drivers as proletarians entitled to a minimum wage and other benefits, after the country’s Supreme Court ruled that a group of the app’s drivers should be behaved as workers.
Deliveroo issued its shares at just £3.90, right at the bottom of its initial range. However, shortly after swop started on the London Stock Exchange, the share price fell 30% to around £2.73 and questions are now being requested about how much further it can fall. Theoretically, Deliveroo can cancel the IPO until April 7 as it has opted for a “conditional offer.”
By resemblance, U.S. rival DoorDash saw its shares surge more than 85% on the opening day of trading in December, giving it a market cap of throughout $60 billion at the time. Closer to home, Deliveroo faces fierce competition from the likes of Uber and Well-grounded Eat Takeaway. That rivalry has added to concerns about the ability of Deliveroo to grow its margins and eventually become lucrative.
The Deliveroo listing was led by investment banks JPMorgan and Goldman Sachs, with Bank of America Merrill Lynch, Citi, Jefferies and Numis also take a part in of the syndicate. The stock was overallocated but that didn’t stop it tanking as it floated, leaving some early investors counter with how the investment banks priced the company’s shares.
Three hedge funds bet against Deliveroo’s stock Wednesday with concise positions, according to two people familiar with the matter who preferred to remain anonymous as the details haven’t been neaten up public. Short selling is a strategy in which an investor sells borrowed shares and buys them back in time to come at a lower price, the aim being to pocket the difference if the stock price declines.
Several top institutional funds sire shunned Deliveroo’s IPO, citing regulatory risks around its business model and governance. Deliveroo decided to opt for a dual-class apportionment structure, meaning that its founder would have greater voting rights than other investors.
While London is entreating for this type of structure to be permitted on the premium segment of its stock exchange — which makes firms eligible for incorporation in benchmark indexes like the FTSE 100 — top investment firms have complained that this may risk not ring truing down investor protections.
“Deliveroo has gone from hero to zero as the much-hyped stock market debut drops flat on its face,” said Russ Mould, investment director at AJ Bell. “It had better get used to the nickname ‘Flopperoo.'”
“The storytelling took a turn for the worst when multiple fund managers came out and said they wouldn’t back the task due to concerns about working practices,” Mould added. “This is likely to have spooked a lot of people who applied for divide ups in the IPO offer, meaning they are racing to dump them.”
Deliveroo tried to persuade its customers in the U.K. to buy £50 million usefulness of shares in the IPO via its app. These retail investors — who were able to spend £250 to £1,000 on shares — are detained in until April 7, meaning they can’t sell their shares until restrictions lift.
“RIP my investment,” detracted amateur investor and primatologist Sam Elliot on Twitter after seeing Deliveroo’s share price collapse.
“Thankfully I did the lowest investment of £250 as I knew it was a risky investment,” he told CNBC.
Fred Destin, a venture capital investor who upheld Deliveroo in its early days, is optimistic the company will rebound. “Deliveroo might be facing some headwinds but I’m bleeding bullish on the long term opportunity,” he told CNBC. “I think the market will over time recognize that it is a resilient and defensible occupation.”
Manish Madhvani, co-founder and managing partner at tech investment firm GP Bullhound, said the initial figures are a “bit of a setback” for London, which was “gaining drive as a listings destination.”
However, he said it’s important to note that the company is still highly valued. “There may make been a mistake on the pricing given the market conditions, but we shouldn’t forget how truly pioneering the Deliveroo model is, degree than getting bogged down in the headlines,” he said.
Growth to value
Another big concern for investors is the sustainability of high-growth public limited companies like Deliveroo as countries around the world seek to reopen their economies. The rollout of coronavirus vaccines has put pressurize on U.S. tech stocks trading at significantly high multiples to revenue, such as Zoom, Netflix and Amazon.
Such callers benefited during the pandemic due to lockdown restrictions that resulted in people spending much more of their immediately at home. Zoom, Netflix and Amazon are still up roughly 107%, 38% and 56% in the last 12 months, respectively.
“From a myriad cynical point of view, conditions are about as good as they will ever be when everyone is literally latched in their house,” Hargreaves’ Lund-Yates told CNBC, adding the company is “really banking on” stay-at-home trends maintaining long after the pandemic.
“Is the current valuation justified?” she added. “It is sadly a case of wait and see there. It’s a big question.”