Should you invest in companies through IPOs? Deliveroo’s recent stock market flop is a perfect example why it may be best to steer clear.

The market for Initial Public Offerings (IPOs) has been strong in recent times, with particularly well-known company names entering the fray. But is it worth ‘getting in at the ground floor’ of a company’s stock market listing?

As the most recent high-profile example, Deliveroo’s IPO can be a valuable lesson for investors. Its IPO took place on  31 March and quickly went down as one of the ‘worst’ IPOs in stock market history – with the share price losing over 30% from its initial starting point of £3.90 per share.

Deliveroo’s stock market launch got off to a shaky start with a price that many investors seemed unwilling to pay. This is why the price kept lowering before it even launched on the market – not a good sign.

It also came under pressure from a chorus of fund managers who declared their unwillingness to participate in the IPO – citing concerns about how it treats its workers, the fact it’s unprofitable and questioning the sustainability of its business model.

The saga has quickly become the posterchild of failed IPOs in recent times – but is far from the only example of a failed share offering launch. Other firms such as Uber – a competitor to Deliveroo in the food delivery space – have had spectacular failed launches too.

This is not to say all IPOs are failures – far from it. Recent listings such as The Hut Group have been relatively successful. Another interesting example is that of home workout equipment firm Peloton – which on its stock market debut saw its price crumble quickly.

The firm has however performed admirably since, thanks in particular to the coronavirus crisis which has led to demand from homeworkers desperate to exercise in their living rooms.

This is the essential quandary for any long-term investor considering participating in an IPO – doing so is something of a gamble. If you’re convinced of the investment case for the company then you should be willing to back it over a long-term horizon.

In the short term the price could fall significantly and lose the investor a lot of money though. Those investors without the stomach for short-term falls will sell and crystalise their losses. For every Peloton or Hut Group there are also plenty of Deliveroos or Ubers.

A such there are a few lessons from the Deliveroo IPO and others that investors should heed:

• Which IPO is right for you? Some company listings such as Deliveroo’s receive large amounts of media attention – but that doesn’t mean they are the best ones to go for.
• Are there clear signals that the IPO might have issues? Deliveroo’s IPO for instance received widespread negative attention before it even listed, with the price lowering repeatedly – a bad sign from the get-go.
• Read the detail. Companies looking to list have to offer investors a prospectus. As was the case with WeWork IPOs can unravel quickly when this document is proven to be written on shaky ground.
• Take a critical view. Deliveroo was given significant criticism of its work practices which led to fund managers declaring themselves uninterested. If someone else is trying to spin a different picture, ask why that might be.
• Wait and see. Investing right at the outset might seem exciting, but waiting for the market to make its value judgement of the share price might leave you with a cheaper entry point to ownership

If you don’t have the time to dedicate to research on a company IPO, you may want to stick to investing through a mix of funds and other diversified asset classes. Investing this way outsources the work of assessing the best investment options for a generally small fee.

Even if you own a fund that has invested in Deliveroo this will be done as one part of a larger range of company stocks that ensure you’re not overly exposed in one place. Investing for most people should focus on long-term diversified growth using a range of products that ensure successful wealth growth – with no gambles whatsoever.

If you’d like to discuss your investments or have any questions from subjects raised in this article don’t hesitate to get in touch with your financial adviser.