Why Deliveroo shares are up 33% in just two weeks

It was the joke of the stock market when it floated three months ago, but brave investors have been richly rewarded.

The “floperoo” tag attached to the much-hyped £7.6 billion IPO of Deliveroo (LSE:ROO) was wearing a little thin today after the food app stretched its shares rebound to 33% in the past fortnight.

This includes a 4% rise to 335p in today's weak market as improved guidance in its maiden trading update suggested a gross transaction value figure as high as £6.5 billion this year.

Sentiment towards Deliveroo has been on the turn ever since the Court of Appeal ruled in the company's favour that its delivery riders in the UK are self-employed. The finding, which follows an appeal by the IWGB union, is the fourth time courts in this country have decided that Deliveroo is not in an employment relationship with its riders.

Shares jumped 9% on the day of the ruling as the verdict appeared to remove one of the factors overshadowing the IPO when it took place at the end of March. Other concerns focused on its ownership structure and the outlook beyond the trading tailwinds provided by the pandemic.

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The stock was initially priced at 390p a share, with an estimated 70,000 customers, restaurants and delivery riders among those subscribing for shares in a £50 million community offer.

They saw the stock plummet 30% during the first day of trading and to as low as 228p, prompting some to describe the IPO as one of the worst in London's history. But investing is about the long term, with the journey of Ocado from IPO dud in 2010 to FTSE 100 heavyweight a useful reminder.

Analysts at Numis believe the shares can return above their IPO level after highlighting a 400p target price in the wake of today's update. They said Deliveroo's second quarter order growth of 88% year-on-year was comfortably ahead of consensus expectations of about 60%.

The delivery firm increased its guidance for gross transaction value growth to between 50% and 60%, from 30%-40%, but warned the profit margin will be at the lower end of its range due to investment costs and expectations that order values will revert to pre-Covid levels.

Numis said: “This is an encouraging maiden trading update from Deliveroo, building credibility following a weak start on public markets.

“We continue to see Deliveroo as our play in the food delivery sector given its hyper-local approach to delivering the best consumer experience underpinning long-term market share gains.”

A Wise investment

Deliveroo no longer has the pressure of being London's biggest-ever tech IPO after money transfer business Wise (LSE:WISE) was valued at an initial £8.75 billion in a direct listing, where the opening auction determined the starting price.

In an IPO, the price is set beforehand by banks in a bookbuilding process, but Deliveroo showed that this is not always an exact science.

Wise shares rose 10% to 880p and recovered from today's weak start to top 900p at one point.

Wise, which used to be known as TransferWise, is a portfolio company of Chrysalis Investments, whose involvement dates back to 2017 when the business was just breaking into profitability.

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Shoreditch-based Wise accounted for 8% of Chrysalis' net asset value prior to the direct listing, with the opening price well above the carrying value in March of 511p.

Chrysalis also enjoyed success with the IPO of Hut Group business THG Holdings (LSE:THG) and is an investor in online payments firm Klarna. It is led by Richard Watts and Nick Williamson, who are part of Jupiter Asset Management’s small and mid-cap UK equities team.

Liberum said of Chrysalis: “The focus on late-stage private companies with clear profit visibility has provided numerous catalysts for NAV growth through funding rounds and liquidity events.”