Deliveroo (LSE:ROO) made its debut on the London Stock Exchange a few weeks ago, and the share price hasn’t exactly had a good start. In fact, according to Reuters, the company achieved the worst first-day performance in the history of London IPO’s above £1bn.
How bad was it? Well, the company was listed at 390p. By the end of the first day, Deliveroo’s share price had fallen by 26% to 287p. And today, it’s now closer to 252p. But has this created a buying opportunity for my portfolio? Let’s take a look.
Can the Deliveroo share price climb again?
Even though the Deliveroo share price has had quite a tumble, the underlying business is actually performing relatively well. In 2020 Gross Transaction Volumes (GTV) increased by 64%, reaching £4.1bn, which subsequently pushed its full-year revenue to reach £1.19bn from £772m a year before.
I think there is some rightful concern surrounding whether this performance can be sustained after the pandemic has ended. However, based on the latest quarterly earnings report, that slowdown has not yet come to pass.
GTV continued to grow in the first three months of 2021, increasing by 130% year-on-year. Total orders more than doubled from 33 million to 71 million. Monthly active users are up 7.1 million versus 3.7 million at the start of 2020. And at the same time, the average number of monthly orders per user has increased by 10%.
Needless to say, these results are impressive. At least, I think so. So why is the Deliveroo share price falling?
The concerns surrounding Deliveroo
Despite this tremendous level of growth, the business remains unprofitable. In 2020, it reported an operating loss of £221m. While this was an improvement compared to the £320m loss in 2019, unprofitable businesses carry significant risk for investors in my experience.
This lack of profitability is the primary reason why the Deliveroo share price has been falling from what I can tell. While the losses are obviously not good news, it’s the path to profitability that has me concerned.
Recently the Supreme Court ruled that Uber drivers are not self-employed freelancers but rather full-time employee’s. Consequently, Uber has been landed with an enormous increase in its operating expenses. Given that Deliveroo operates in a very similar fashion, it’s likely that a similar conclusion will be made for its riders.
In fact, this is why many large institutional investors like Aviva have outright avoided the company.
The bottom line
Deliveroo has so far produced some very impressive results, despite what the share price might suggest. However, the uncertainty surrounding the classification of its riders does make me somewhat cautious.
For now, the stock is staying on my watch list. And so I won’t be buying shares for my portfolio today, even at the currently reduced share price.
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Zaven Boyrazian does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. The Money Cog have published an analysis of Deliveroo. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.
