Deliveroo leftovers attracting some interest

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Wags have dubbed the initial public offering from Deliveroo Holdings PLC (LON:ROO) “flopperoo” or “deliveroops” after the company’s advisors misjudged the market.

The shares were priced at 390p each, ostensibly valuing the company at £7.6bn, but currently languish at 285p or thereabouts, putting a market value of £5.6bn on the company.

OK, it’s not a flotation disaster of Aston Martin Lagonda Global Holdings PLC (LON:AML) proportions but a £2bn miscalculation is still very embarrassing for those highly-paid advisors.

Goldman Sachs and JPMorgan were the joint global coordinators of the flotation and were in possession of information that suggested investors valued the food delivery app company at around £5.1bn.

In its last funding round before it floated, Deliveroo raised US$180mln in January at a price that implied a valuation of US$7bn, which is roughly £5.1bn.

Somehow, in the space of three months that valuation had risen to £7.6bn, which begs the question, how do you value a company that – except in the exceptional circumstances of lockdown restrictions in its main market – is not making money?

Well, those pre-flotation funding rounds give a big clue. A company is worth whatever somebody is prepared to pay for it.

How does that “somebody” determine a fair price for a non-profit-making company?

Not so overpriced in comparison to Doordash?

A good starting place is to look at annual revenues and the rate at which those revenues are rising and then look at the market capitalisation of similar(ish) companies.

So, US counterpart Doordash, which saw its shares rise 86% on their first day of dealings, is valued at US$42bn. It has annual revenues of US$2.89, so it is valued on a revenue multiple of 14.54.

Doordash’s annual revenues grew 226% last year.

In 2020, Deliveroo had revenues of £1.19bn, which means it is now valued at a multiple of just 4.7, while the flotation price put it on a revenue multiple of 6.4.

Admittedly, 2020 was an exceptional year, what with the UK popping in and out of lockdown like a husband stepping in and out of the wardrobe in a Whitehall farce, but on a revenue multiple that is half of what Doordash got away with, the pricing SNAFU seems understandable.

Of course, Doordash boasts a far superior growth rate (226%) while Deliveroo, reportedly the fastest growing £1bn+ company in Europe, managed 54.8% growth, which might account for why US investors welcomed the Doordash initial public offering (IPO) like Shaggy hungrily waiting for a delivery of Scoobie snacks while London treated Deliveroo’s flotation like a visit from Jehovah’s Witnesses.

US investors are also probably a lot less squeamish about the labour practices of delivery companies such as Deliveroo than are UK ones. US labour laws offer the sort of protection that even Lady Godiva would describe as insufficient so US investors are probably used to a scenario where a working person is expected to get a fair day’s pay for a fair week’s work.

READ Deliveroo flotation has many strikes against it

UK institutional investors were a lot more leery of the business model, picking up on Deliveroo’s admission in its prospectus that “our business would be adversely affected if … changes in law require us to reclassify our riders as employees”.

Any appetite for the leftovers?

The flotation is now water under the bridge and the decision facing investors is whether this technology firm will go the way of other “disruptive” pioneers such as MySpace and Netscape, or whether it will – in the (very) long run, benefit from being well enough funded to crush all of its competitors.

To be fair, although there is a hell of a lot of delivery start-up companies out there, such as Weezy, Jiffy and Dija in the UK, Kolonial (now rebranded as Oda) in Norway and Cajoo in France, they all seem to be focusing on the delivery of groceries and other household items, rather than takeaway food.

That leaves Uber Eats, Just Eat Takeaway.com and Amazon Prime as Deliveroo’s main competitors in the UK, and it’s worth remembering that Amazon.com holds a 16% stake in Deliveroo and has reportedly made two attempts to buy the company outright. It’s also worth remembering that without that cash injection, Deliveroo probably would have gone out of business.

If it can see those competitors off, or at least survive against them, then it might stick around to stage the sort of startling recovery enjoyed by the likes of Facebook and Ocado; both of those companies had a sceptical reception when they first floated and that “will they ever make money” perception hung around for ages.

Over a 12-month horizon, broker Berenberg is looking for the shares to rally a bit to 310p, and rates the shares a hold.

“While the pandemic has clearly benefited the business, and there may be some reversal of this over the next year, we expect demand for at-home dining and food delivery to continue to grow over the medium to long term as consumers place an ever-increasing value on convenience services,” Berenberg said in a research note published on Thursday.

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