Deliverwho?

• Global
• Deliveroo, DoorDash, GrubHub, IPO, London Stock Exchange, Nasdaq, NYSE, Snowflake, Uber
• March 31, 2021

Here’s a quick insight into the world of investment banking and capital raising…

Bankers are focused on hot money

They like Porsches and Porsches require bonuses. It’s hard work to try and sell something that nobody wants. When the pancakes are flying off the shelves, you don’t open a stall selling fried organic broccoli cooked in vegan oil. You recognise what the market wants and you give it a sugary alternative to pancakes.

When it comes to high-profile listings, the same principle applies. When the tech market is frothy, tech companies will knock on the public door and ask for money. A boom in IPOs (new listings to raise capital) is a lead indicator for me that markets are running hot.

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Timing is everything in this game. For example, DoorDash managed to list at the start of December last year and closed 85% up on the first day. That took it to a valuation of 16x revenue, which is somewhere between ridiculous and nonsensical when you remember that the revenue used for that calculation was generated by people who actively chose to avoid restaurants and order food instead.

Obviously, that’s not reflective of consumer behaviour over the long term. That didn’t stop investors climbing in.

Here’s the real kicker: DoorDash made a loss of $149 million in 2020.

The company’s debut price of $182 per share is long forgotten, as the stock now trades below $130. That’s a drop of nearly 30%, which should be compared to the Nasdaq-100 which is up around 5% over the same period.

I avoid IPOs completely

As a rule, I don’t touch new listings.

Institutional investors get in at pre-IPO phase, which is when there is money to be made, like Berkshire Hathaway’s participation in the Snowflake IPO (which I indirectly enjoyed as a Berkshire Hathaway shareholder). By the time retail investors get involved, the bankers and institutions have already chosen what colour Porsche 911 they want this year.

I see a lot of excitement on Twitter whenever there is an IPO. That’s part of why I avoid them.

There’s an art in investing in the companies that people aren’t talking about yet. Investors and bankers have entirely different time horizons and one often loses out at the expense of the other. Bankers are paid to maximise the price and investors want to pay as little as possible. Bankers run IPOs and that’s good enough for me to stay away.

Dis-Chem was a great local example, listing at a time when the JSE was hot for new listings (yes, such a time existed). Promising wonderful things to everyone, Dis-Chem raised over R4.3bn in its IPO and closed 16% above the offer price on market debut.

The valuation multiples at the time were high, but that didn’t stop the Dis-Chem share price jumping 80% over its first 12 months as a listed company. Unfortunately, it’s now barely 10% above its market debut. Momentum trading (which would’ve been appropriate for Dis-Chem in its first year) is a specific trading strategy that I don’t follow. I try very hard to only buy things that I see myself holding for at least 5 years, which means I need to avoid overpaying.

Thus, I avoid IPOs. I would far rather wait for price discovery to take place and for the company to at least release one set of results as a public company, which can be compared to the promises made in the prospectus (listing documentation).

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Deliverwho?

Deliveroo is the latest new listing on the market and the share price has severely faltered, dropping 30% on the opening day.

There are numerous possible reasons for this, including a thesis around the tech bull market running out of steam. Yet, Roblox had no such issues earlier this month, climbing 63% in just two days when it listed on the New York Stock Exchange. Roblox has cooled off a bit since then, but the gaming market is clearly popular among investors (and I really like it too).

So, if the problem isn’t with the market as a whole, then what has gone wrong for Deliveroo?

DoorDash gives us a clue, down nearly 30% since listing as mentioned previously. Competitor GrubHub is down 12% over the same period. Investors are struggling to see a path to profitability for the food delivery business model, which isn’t great news for UberEats either although the Uber share price has been resilient. Naspers also won’t have enjoyed this Deliveroo listing, as the proud owner of Mr D locally.

Deliveroo’s attempted valuation is part of the problem. As the largest listing in London since Glencore nearly a decade ago, Deliveroo’s market debut has come too late in the cycle that it has depended upon to justify its valuation.

In the UK, investors still care about profits

In the US, where stonks always go up thanks to stimulus, we can safely conclude at the moment that everything is made up and the profits don’t matter. Investors continue to value listed tech stocks the same way angel investors operate do: based on total addressable market and eventual market share.

Will it be profitable? Maybe, maybe not. Sounds like the problem of whomever I sell my shares to.

That’s the “greater fool” strategy in action. Clearly there are fewer fools in the UK, where leading institutional investors care about things like profitability, labour risks and governance models.

Therein lies Deliveroo’s biggest problems. The dual-class structure gives the founder super voting rights, which is hated by institutional investors. The other major risk is the gig-economy labour model used by Deliveroo, where workers are self-employed and therefore don’t qualify for benefits or sick leave.

There is a lot of regulatory momentum in this space to force companies to give such workers the same benefits as permanent staff, throwing a spanner in the works for the business model that Uber pioneered. Clearly, this would significantly increase staff costs and severely damage the profitability of these businesses which is already in doubt.

Deliveroo’s pre-IPO investors will be prevented from selling further shares for up to 180 days due to lockup rules. This was the same situation with Palantir and there was considerable pressure on that share price when the lockup expired. Put a note in your diaries – things might get even worse for Deliveroo when that lockup expires.

Deliveroo’s listing disaster doesn’t bode well for London’s image as a tech listing destination. Perhaps companies with big promises and low profits should just list in America instead, where the money is easy and people only read the top part of the income statement anyway.

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