The Deliveroo (LSE:ROO) share price slumped by 30% at one point on its first day of trading. Shares of the food delivery business started trading on Wednesday 31 March at an initial offer price of 390p.
The Deliveroo share price traded below 280p in volatile conditions. It then stabilised to hover around 300p later in the day.
The share price decline came despite the company choosing to offer at the lower end of the price range due to “volatile” market conditions.
Why did the Deliveroo share price slump?
The price of shares in an initial public offering (IPO) is typically set by an investment bank. Once a stock exchange has accepted the application to list on the stock market, the company asks an underwriter to help decide the number of shares and the price.
The underwriter is usually an investment bank that looks for investors to subscribe to the IPO. However, valuing a company is neither easy nor accurate. Often, the initial price is not close to the price the shares subsequently trade for.
I tend to avoid IPOs altogether for this reason. The first few months can be fraught with uncertainty surrounding the market dynamics and investor appetite.
In this scenario, the Deliveroo share price may have slumped on day one if it was mis-priced.
Will Deliveroo deliver for investors?
Some institutional investors that decided not to invest cited reasons of risks surrounding worker rights. Profit margins could be squeezed if gig economy workers are offered traditional economy benefits. Currently, the company classes its couriers as self-employed contractors. This mean they aren’t entitled to holiday pay or the national minimum wage.
Any change to regulations could materially affect Deliveroo’s business model, in my opinion. Deliveroo does not currently make a profit, and any further pressure on its business model could extend the road to profitability.
Several factors could affect the Deliveroo share price in the coming months. Stock markets look forward and try to anticipate the future. With reopening plans currently on track, the coming months could see restaurants re-open and workers start slowly moving back to offices.
In 2020, Deliveroo experienced rapid adoption of online food delivery. It will be interesting to see the effect of consumer behaviour when the economy opens up again.
On a positive note, I like that Deliveroo is still founder-led. Will Shu, co-founder of the company has ‘skin in the game’. The company has the potential to dominate the food-delivery market. I particularly like the delivery-kitchen concept where it has created pop-up restaurants where it has identified gaps in the market. These are specially designed for delivery.
Deliveroo is an innovative company and it is constantly looking for ways to grow. In 2021, it is looking to expand its on-demand grocery offering. This is the fastest-growing part of the business and I believe it could have some potential.
Overall, I think the Deliveroo share price could remain volatile in the near term as the market adjusts. For me, it’s just too risky at the moment, so I won’t be investing.
The post The Deliveroo share price drops by 30%. Here’s what I’d do now appeared first on The Motley Fool UK.
Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2021