Deliveroo IPO: Analyzing the Rough Stock Market Debut

Deliveroo's Challenging IPO

Deliveroo experienced a difficult start to its public trading journey.

Following an underwhelming initial public offering (IPO) price, the company’s stock value has declined today, representing a less-than-ideal market entry for the popular delivery service.

Analyzing the IPO Performance

A key inquiry now is to understand the reasons behind Deliveroo’s IPO struggles, particularly given the generally favorable conditions for tech IPOs recently.

The European unicorn chose to list on the London Stock Exchange, potentially encountering a different investor sentiment compared to the more enthusiastic reception seen with recent IPOs in the United States.

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As TechCrunch reported earlier this week, concerns existed locally regarding Deliveroo’s corporate governance and its approach to worker rights.

Initially, these concerns resulted in a reduction of the company’s anticipated IPO valuation.

Factors Contributing to the Struggle

What factors contributed to Deliveroo’s difficulties when trading commenced?

Could a disconnect exist between the company’s rapid growth strategy and the expectations of more traditional European investors?

Let's examine the financial data to gain a clearer understanding of the situation.

Deliveroo and DoorDash: A Valuation Comparison

Let's begin by examining the contrasting valuations assigned to Deliveroo and DoorDash by the financial markets. Should these valuations be relatively similar, the notion that Deliveroo faces heightened scrutiny compared to its American counterpart could be dismissed.

Our focus isn’t on the valuation of any single company, but rather on whether a listing on a European exchange results in increased criticism for companies prioritizing growth over immediate profitability – disregarding, for the moment, the implications of Brexit.

To facilitate this comparison, here’s a concise overview of the relevant data, starting with DoorDash:

• DoorDash’s 2020 revenue totaled $2.886 billion.
• Year-over-year revenue growth for DoorDash in 2020 was 226%.
• DoorDash’s current market capitalization stands at $41.98 billion.
• This translates to an implied 2020 revenue multiple of 14.54x.

Now, let’s turn to Deliveroo:

• Deliveroo reported £1.191 billion in revenue for 2020.
• Deliveroo’s year-over-year revenue growth in 2020 reached 54.3%.
• Deliveroo’s market capitalization is currently £5.55 billion.
• This results in an implied 2020 revenue multiple of 4.66x.

It’s important to note that Deliveroo’s market cap is based on its current share price and is subject to change. Furthermore, Deliveroo initially had a higher revenue multiple at its IPO, while DoorDash’s was lower upon its debut; DoorDash shares have appreciated since then.

However, it would be an oversimplification to state that Deliveroo is trading at a significantly lower revenue multiple, thereby suggesting that a European public offering is disadvantageous.

Consider the disparity in the companies’ growth rates. Deliveroo achieved substantial growth at scale in 2020, whereas DoorDash experienced an exceptionally strong year; it’s logical that DoorDash commands a higher multiple. Whether this growth premium is accurately reflected in its valuation is a matter of individual assessment.

Beyond growth, other factors are also relevant. Both DoorDash and Deliveroo employ dual-class share structures that concentrate voting power, making this aspect comparable. Both companies also face labor-related concerns, though recent rulings regarding Uber may suggest that Deliveroo’s challenges are somewhat more pressing.

Typically, I would attempt to synthesize these figures to arrive at a clear conclusion. However, a direct comparison is difficult due to the limited number of comparable companies in this sector – this isn’t the SaaS landscape.

Uber is an obvious candidate, but its diversified business units make it an unsuitable benchmark. Therefore, we must evaluate Deliveroo’s multiple independently. It’s worth noting that Deliveroo successfully doubled its gross profit last year and reduced its losses. Increasing take rates and improved economics are positive indicators.

Therefore, I propose that Deliveroo is being evaluated differently on the LSE than it might have been on the Nasdaq or NYSE. This is not a favorable outcome for Deliveroo currently, nor for Europe in the future.

What accounts for this differential treatment? It appears European investors place a greater emphasis on factors beyond purely financial performance. Consider this statement from CNBC following Deliveroo’s IPO price reduction:

A striking observation, particularly unusual within a capitalist framework, if I may add.

The Wall Street Journal quoted Cazoo CEO Alex Chesterman, who stated that going public “in the U.K. is challenging for companies who are investing in high growth,” and that these companies “are better understood by U.S. investors.”

This understanding, in turn, leads to more favorable valuations.

In conclusion, today’s events suggest a setback for the European stock market’s efforts to attract and retain domestic IPOs. Furthermore, a prominent IPO underperformance can negatively impact market sentiment across the board.

A disappointing day, overall.