Deliveroo – Unfairly hammered?

Lack of support looks to have been the cause.

• Deliveroo took a hammering on its first day of trade falling 26% below the issue price in what I suspect has more to do with institutional support than its valuation.
• This is a major black eye for the London Stock Exchange and may make other companies such as Oxford Nanopore (in which I have an indirect holding through IP Group) think twice about where they intend to go public.
• Deliveroo is a delivery company that allows restaurants to offer takeaway delivery without having to invest in the infrastructure themselves.
• In a nutshell, it is the same as Uber Eats and DoorDash except that most of its revenue comes from the UK and Ireland.
• Consequently, these are the peers against which it should be compared when considering financial performance and valuation.
• In 2020 Deliveroo earned revenues of £1.2bn (US$1.7bn) representing 54% growth and lost £221m (operating profit) but critically, broke even on operating cash flow.
• DoorDash earned $2.9bn in revenues in 2020 growing 226%, lost $436m in operating profit and also generated $252m in cash from operations.
• However, despite a 38% decline in its share price, DoorDash is still trading on around 10x 2020 EV / Sales while Deliveroo after its 26% crash yesterday is on 4.2x 2020 EV / Sales.
• Deliveroo’s saving grace (like DoorDash) is its cash generation.
• Despite losing £221m in 2020, it managed to generate $7.4m in cash from operations as its chosen business model is one that has negative working capital.
• This is an unusual situation where short-term liabilities grow faster than short term assets meaning that growth can become self-financing.
• In Deliveroo’s case, trade payables and provisions grow much more quickly than receivables largely because it takes payment on the spot but has time to pay its creditors.
• DoorDash is similar in that it generated $252m in cash from operations despite losing $461m in 2020 in operating profit.
• DoorDash’s growth is expected to slow in 2021 to 28% YoY which will put it broadly in line with where I think expectations for Deliveroo are.
• Hence, DoorDash and Deliveroo are very similar companies but DoorDash is trading at double the multiple that Deliveroo is for no other reason than it is listed in the USA.
• While all of these companies can easily be described as overvalued, as a comparative exercise, the IPO price of Deliveroo at £3.90 does not appear to be excessive and so I don’t think it was valuation that crushed the shares on day 1.
• I think that it is far more likely that it is the corporate governance issue that caused the problem (see here).
• Many UK institutional investors (see here) gave this IPO a pass meaning that the book-runners had to fill the books with lower quality investors who were in the IPO to make a quick profit on the first day.
• Hence, there were no quality long-term buyers active in the market to soak up supply and so the decline became a rout.
• If I was going to invest in any of the delivery companies (which I am not because I think it is going to be a bloodbath of cutthroat competition), it would be this one.
• On a fair comparison to DoorDash, Deliveroo is well below the 30% discount I would give it for poor corporate governance and so I think that this becomes less of an issue in the investment thesis.
• However, I am negative on the sector overall because of intense competition and so I would not own any of it.
• If you forced me, it would be this one.