Should You Dine Out On Deliveroo’s $12 Billion IPO?

Should You Dine Out On Deliveroo’s $12 Billion IPO?
Andrew Rummer

almost 3 years ago5 mins

Mentioned in story

What’s going on here?

Deliveroo released details of its imminent initial public offering (IPO) this week, putting the food delivery firm on course to become the biggest addition to the British stock market in a decade. We’ve crunched the numbers to help you figure out whether you should grab a slice of Deliveroo’s newly public stock – or take your cash out of contention.

What does this mean?

The company’s aiming to raise nearly $1.4 billion selling shares at between £3.90 and £4.60 ($5.35-$6.32) a pop, giving it a total market value of $10.5 billion to $12.1 billion. And unlike in most IPOs, retail investors will be able to get an immediate bite of Deliveroo’s apple: some $69 million worth of shares are exclusively available to smaller investors.

You can find details of the share sale here and the IPO prospectus itself here. Deliveroo’s shares will begin trading on April 7th.

Digging into the prospectus, the key figure Deliveroo wants investors to focus on is its gross transaction volume (GTV) – the total value of orders that flow through its app. This has grown strongly since Deliveroo’s launch in 2013, and last year the platform and delivery provider managed to capture 29% of GTV as revenue of its own, mainly through the commissions it charges restaurants.

Source: Deliveroo
Source: Deliveroo

Assuming that 29% take rate stays constant in 2021, GTV predictions imply the company’s revenue should come in between £1.54 billion and £1.66 billion (equivalent to a little over $2 billion). The IPO therefore values Deliveroo between 4.6 and 5.7 times its next financial year’s revenue. By comparison, Anglo-Dutch giant Just Eat Takeaway.com’s shares currently trade at 3.7x projected revenue, while recently listed US behemoth DoorDash trades at 12x.

Why should I care?

The tasty stuff

1️⃣ Deliveroo is a big-name addition to a UK stock market that’s been starved of high-profile newcomers in recent years. Impressively, the company managed to grow GTV by 64% last year – even as it reduced marketing costs to 3.3% of GTV from 6.5% in 2019. Lockdowns are clearly good for somebody’s business.

2️⃣ Deliveroo has been expanding rapidly outside its home market. Roughly half of its revenue now comes from outside the UK.

3️⃣ The firm is keen to stress its tech credentials and ability to drive efficiency as it grows: “machine learning” gets seven mentions in the prospectus.

The less appetizing aspects

1️⃣ Deliveroo operates a three-sided marketplace of diners, restaurants, and delivery riders – and it needs all three to grow together.

2️⃣ Deliveroo’s breakneck expansion is likely to ease as lockdowns lift. The company expects GTV growth to slow to 30-40% in 2021 and settle at 20-25% over the medium term.

3️⃣ The firm’s food deliveries are handled by freelance contractors. Deliveroo’s prospectus notes that profits would take a hit if “changes in law require us to reclassify our riders as employees” – and Uber recently had to do something similar in the UK.

4️⃣ There’s no word on when exactly the company plans to achieve profitability: it’s still focused on using its cash flow to drive growth.

So should you buy shares in the IPO? Ultimately, you need to believe that Deliveroo can one day find a way to turn all that revenue into consistent profit – or at least that other investors think that’ll happen…

Carl’s take

By my analysis, Deliveroo is always going to struggle to deliver any sort of sustainable profit. Let’s start by looking at the company’s unit economics – bearing in mind that the comparison I’ve chosen to use here, Just Eat, mainly just connects customers to restaurants as a pure platform business, rather than taking responsibility for delivery as well.

Comparison of Just Eat vs. Deliveroo’s unit economics (in £)
Comparison of Just Eat vs. Deliveroo’s unit economics (in £)

Unlike Deliveroo, Just Eat discloses its average order value. Taken together with the relative makeup of restaurants on both platforms, however, we can use this to make an educated guess at the average order value on Deliveroo (shown as “GTV” above).

Besides the respective commissions that platform and platform+delivery food businesses charge restaurants, the key thing to note is the added cost the latter approach involves. Whereas pure-play platforms force restaurants’ own drivers to make drops, companies like Deliveroo hire (or at least pay) delivery drivers directly.

While Deliveroo makes a higher absolute gross profit as a result, its profit margin is almost half that of platform-focused rivals. This means the only way it can cover central costs like marketing, salaries, and office expenses and eventually become profitable is by increasing scale. And there are two problems with that:

1️⃣ Deliveroo’s average order size is roughly double Just Eat’s thanks to the pricier, often eat-in restaurants it hosts on its app. Scaling up will require adding more customers or increasing the frequency of existing ones’ orders – but that might be difficult post-pandemic.

2️⃣ On a busy weekend or a rainy day, Deliveroo can max out easily: demand’s through the roof for food at home. But that’s unlikely to be the case on a Tuesday afternoon – and the company still has to pay both its central costs and drivers on standby. The big question is whether Deliveroo can make enough money in busy times to compensate for the losses it inevitably endures during quieter periods.

Looking to Just Eat might provide an answer. It’s been the market leader in Denmark for two decades, where it also offers in-house delivery (primarily in Copenhagen). This represents just 4% of orders and generates a 5%-7% EBITDA margin (vs. 40% for Just Eat’s platform business) despite no competition meaning limited marketing spend. That’s probably the best-case scenario for Deliveroo – and not a very likely one at that…

I’m yet to hear an investment case for Deliveroo based on the company’s fundamentals, and while it could well have a successful IPO, the analysis above leaves me worried about its long-term prospects. Still, we’d love to hear your investment case if you’re tempted to buy: post it in your Finimize Premium Group and see what other Finimizers think.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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