Deliveroo's Rocky Ride: Can the LSE-Listed Giant Bounce Back from IPO Lows?

Once a stock market sensation with an IPO debut price of 390p per share, Deliveroo (LSE: ROO) has faced a tumultuous journey on the London Stock Exchange since its inception. At its peak in August 2021, the company’s shares reached a remarkable 400p. However, they are currently trading at around 121p, causing many to question the future of the food delivery giant.

The company’s initial public offering on March 31, 2021, was met with high expectations. Unfortunately, Deliveroo’s stock price dropped to around 290p on the first day, shattering investor confidence. Despite a temporary bounce, it has continued to decline to its current levels.

Described as one of the most poorly performing IPOs, Deliveroo has grappled with investors’ scepticism about its profit forecasts. The central issue appears to be the company’s struggle to generate substantial earnings, even a decade after its establishment. While revenue growth has been robust, translating this into profit has been a constant challenge.

Analysts suggest that even if Deliveroo manages to turn its financials from red to black, the nature of the food delivery business implies that it might remain a low-margin industry. It’s challenging to extract significant profits from the average takeaway without alienating cost-conscious customers.

Deliveroo is increasingly seen as a commodity-style business rather than a high-earning enterprise with a strong competitive edge. Nevertheless, the demand for delivered groceries and takeaways continues to expand, providing a glimmer of hope for the company.

Over the past decade, Deliveroo has been diligently building its network of food suppliers and nurturing strong trading partnerships while striving for operational efficiency. The company has also pulled back from certain regions to focus on profitability. However, the fierce competition in the food delivery industry is expected to limit profit margins in the future.

Despite the challenges, analysts foresee positive normalised earnings of approximately 1.06p per share in 2024. This anticipation has prompted the share price to inch up from a low of under 80p in the autumn of 2022.

While there is speculation that the stock could potentially return to 200p, there is a lingering valuation risk. Deliveroo’s forward-looking earnings multiple, in comparison to earnings expectations, remains in the triple digits, highlighting the long road ahead for the company to justify its valuation.

The third-quarter trading update, released on October 19, did little to boost confidence. The report lacked any mention of earnings, raising concerns among investors. Deliveroo only expects adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) to be in the range of £60m-£80m for the full trading year ending on December 31.

Disclaimer: This article does not constitute financial advice and should not be considered as such. All investment decisions should be made after thorough research and consideration of individual circumstances.