UK-based food delivery company Deliveroo has had a rocky start in the stock market after its shares plummeted by more than 26% on its initial public offering.
Is this the worst ever stock market debut by a company in history? What exactly went wrong? Let’s find out.
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Deliveroo’s stock market debut: everything you need to know
Deliveroo’s long-awaited debut on the London Stock Exchange turned out to be a day to forget as its shares plunged by double digits.
Earlier this month, Deliveroo had said that it hoped to be valued at around £7.6 billion after going public. The share price drop wiped out more than £2 billion of that.
The company had set its opening share price at 390p. However, shares fell to as low as 271p at one point in early trading, a drop of more than 30%.
The shares recovered some ground later in the day, closing at 287.45p, which is still down 26.3%.
This officially makes it the worst first-day performance for a sizeable London IPO (above £1 billion), according to Reuters.
What went wrong for Deliveroo?
The jury is still out. However, there’s already much speculation as to what might have gone wrong or caused Deliveroo’s underwhelming stock market debut.
Some financial analysts and experts are beginning to wonder whether the company might have overvalued its worth.
According to the Evening Standard, some hedge funds might have seen how potentially over-valued the firm was and piled into short positions.
Corporate governance issues could also have played a role. Some major institutional investors, including M&G, Aviva Investors, and BMO Global, had already stated that they would not participate in the flotation, citing concerns about how the company treats its riders.
Furthermore, institutional investors might have stayed away from the flotation because of concerns about its structure.
Deliveroo is one of the first companies to take advantage of the London Stock Exchange’s new listing rules. The new rules essentially allow a company’s management or founders to list by selling shares but retain control from a voting perspective.
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Which other companies have had bad stock market debuts?
Deliveroo’s disastrous debut is reminiscent of the performance of US ride-hailing company Uber, which saw its shares plunge by over 7% after a long-awaited IPO.
However, Uber has seen a resurgence in its share price in recent times. This should at least provide some solace to Deliveroo, as it demonstrates that things can be turned around.
Another company that had a bad stock market debut is US exercise bike maker, Peloton.
The company’s shares fell 11% below its opening price in September 2019. However, like Uber, its stock has since recovered as people in lockdown attempt to exercise more while confined to their homes.
What can investors learn from Deliveroo’s stock market debut?
One thing that investors can learn from Deliveroo’s opening day stock market performance is the importance of doing their homework.
Doing some research could have made investors aware of some of the institutional investors’ concerns about things like corporate governance and overvaluation.
Another lesson is the importance of patience. Flotation stock is extremely risky. There are usually so many unknown factors.
Sure, shares bought during a flotation may occasionally deliver huge gains for investors who are able to get in early. At the same time, there is always the risk of the value plummeting.
That’s why, for many investors, it might be a good idea to wait. In other words, give the stock a few months to settle so that it can find its true value.
Investing for the long term
Here at The Motley Fool, we are big advocates of investing for the long term. We believe that when it comes to investing, the most important thing is to craft an investment strategy that is based on your preferences, goals, capabilities and risk tolerance and then stick with it.
It’s a much safer and more promising play than, for example, trying to chase potential short-term gains such as those promised by flotation stock. As Deliveroo has proven, these are not always guaranteed.
Though past performance is not a guarantee of future returns, the stock market has a strong track record of helping investors build wealth. But that’s only if you play it smart.
If you’re completely new to the world of investing, consider taking a look at our comprehensive investment guide for beginners. Or if you’re already familiar with the market and ready to begin trading in stocks and shares, check out our picks for share dealing accounts in the UK.
