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Does Deliveroo share price weakness mean it’s time to buy?

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·3-min read
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The Deliveroo (LSE: ROO) flotation in March was keenly anticipated. Home deliveries were a big thing, and getting bigger. Now, a cynic might suggest that an IPO is merely an opportunity for private stockholders to cash in their assets. In an attempt to reassure potential investors and provide a bit of early confidence in the Deliveroo share price, the company attached some lock-in conditions.

The deal prohibits existing holders from selling for at least 180 days, with that horizon expanded to a full year for company directors. I applaud that, but it could come back to bite investors. I’ll get back to that shortly. But first, I’ll remind us how the Deliveroo flotation went.

It was a flop. By 23 April, the Deliveroo share price had fallen to 224p. That’s a 43% loss on the initial offer price of 390p. Is this a suitable time for me to say again that I never buy at IPO? Companies come to market to benefit their existing owners, not to provide me with a bargain buy. So they’ll try to set the timing and the price to make maximum gains for themselves.

There’s obviously nothing wrong with that, but I always remind myself of it whenever I’m tempted to think “Ooh, they’re letting me in on a good thing cheap, so maybe I should fill my boots.

Deliveroo share price still down

At 262p as I write, the Deliveroo share price has recovered a bit. But we’re still looking at a 33% fall since flotation. Still, after a couple of rocky months, the shares appear to be stabilising. That might be a good thing, as it suggests the market has found a valuation it’s happy with.

But for me, there’s one main reason why I can’t share that apparent confidence right now. It’s because I really don’t know how to estimate a fair value for the stock, and I won’t have any real clue until it turns profitable. Oh yes, Deliveroo hasn’t made any profit yet.

Deliveroo’s most recent trading update revealed a 130% year-on-year rise in gross transaction value. That’s impressive, but that gain has clearly been boosted by the pandemic. How things go now that lockdown is over and the end of coronavirus restrictions is approaching is a big unknown. And I wouldn’t buy a stock until I see the company in action during normal times.

Will the lock-in bite?

Anyway, what of the lock-in thing that I suggested could be something of a double-edged sword? Fellow Motley Fool writer Paul Summers explained it well. In short, a whole bunch of pre-IPO owners will be free to sell their shares and pocket their profits come September. If they do, that could put some downward pressure on the Deliveroo share price.

But here’s where I find the whole thing a bit frustrating. I do see a pretty good chance that Deliveroo will go on to reward investors very well in the coming years. And I often look back on successful growth stocks and think what might have been had I had the courage to get in earlier. It could happen with Deliveroo. But there’s just too much uncertainty to suit my conservative approach to risk these days.

The post Does Deliveroo share price weakness mean it’s time to buy? appeared first on The Motley Fool UK.

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Alan Oscroft 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

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