Things Can Only Get ?

Q1 was “interesting”. More financial madness in 3 months than I’ve seen in 35 years, but at least it was fun. How much more sober and boring might the market become? Deliveroo’s botched IPO suggests Investors ain’t as stupid as we think.

Blain’s Morning Porridge – April 1st 2021 – Things Can Only Get ?

“No one ever went broke underestimating the intelligence of the people…”

This morning: Q1 was “interesting”. More financial madness in 3 months than I’ve seen in 35 years, but at least it was fun. How much more sober and boring might the market become? Deliveroo’s botched IPO suggests Investors ain’t as stupid as we think.

And finally, after the misery of driech 1st quarter and lockdown, we enter the bright sunlit promising uplands of Q2. As the song goes … “Things can only get better”. Except, of course, they seldom do…

April 1st would traditionally be the day I attempt to play some un-hilarious joke on the market – a April Fool… but the market has pretty much beaten me in terms of barely believable stooopid throughout 2021. Hype is a commodity in plentiful supply.

You really can’t compete with the madness we see all around and everyday. From SPACs of “tech” companies using Excel spread-sheets to make a dollar sale for every $5 they spend. Meme stocks that roller-coaster depending on the anger of RobinHoods. An unwearable digital sneaker that costs $10k as a Non-Fungible Token. ESG funds with oil majors as their top positions, or the sustainables fund highlighting an auto’s green bond dedicated to improving car safety as an ESG compliant investment – car safety? Who would have thought? Or a fund up to its’ oxters in tumbling EV paper sagely declaring the stock will quadruple despite rising competition.

Or maybe it’s the way the market was on tenterhooks as a result of 3 basis points move in the “risk-free-rate” of government bonds. In bonds there is truth – and if they rise, the whole confabulation of higher for longer in stocks will shatter.. or so say the doomster pessimists. The optimists are certain central banks will keep juicing the party forever.

Or maybe it’s been the proofs of how distorting ultralow interest-rates are to market behaviour. The hunt for returns distorts common sense. Investors become easy marks for promises of low-risk/high returns. Widely speculative investment moonshots are passed off as safe and predictable. Shirts will be lost. And zero returns means investors have to juggle – and might just be tempted to bargain their souls with the pernicious gods of leverage. That didn’t end well for Archegos or the bank’s that found themselves funding it.

The reality, however, is the madness may be passing.

I think there are shades of reality beginning to make themselves felt across markets. Telsa, the bell-weather of hyped valuations, remains well off its Jan peak. It is still seriously overpriced. The rotation out of the over-hyped corners of Trend and Momentum driven Tech hopes, into the dull, boring and predictable earnings of fundamental and value equity plays is well underway.

That shift is being accelerated by the growing realisation – no matter what the Germans say – that vaccines are beating the pandemic and the world will reopen. Stocks that did well on pandemic now face a reckoning; did they meet and exceed their adoption expectations? Likewise, the pandemic losers are the next guess – which will recover fastest and strongly enough to survive.

I detect a new sense of purposefulness hitting many of the investment desks I speak with – they hype, fear and bubble of the pandemic is being replaced with a more sober and facts-based analysis of what the future looks like.

I’m particularly excited by Blackboulder’s new “ERM” ETF. The Economic Reality & Management Fund aims to realise value in firms adversely affected by the swirls and currents of market fashion – investing in underperforming stocks impacted primarily by direction and distortions. Target investments include firms derated by the market because of perceived ESG failings, pandemic side-effects, political factors such as race and gender, and market hype.

The concept isn’t a “bad-boys” fund, but seeking price discrepancies where the effects are overplayed. The key feature of the fund, however, will be the quality of target firm’s management. The concept is to pick strong management who can deliver highly profitable, high dividends and growth with “sustainable” future earnings rather vague and woolly notions about saving the planet. A surprisingly high number of long-established firms meet the fund’s criteria – but attract little market focus when the unmissable alternative is investing in an asteroid mining start-up valued at $10 bln.

And speaking of disappointments.. I guess we have to talk about Deliveroo, officially the worst IPO in UK financial history.

Oh dear. Yesterday’s crash sets the bar high in term of fantabulous hopes meeting crushing reality. Embarrassing for our financial genius and ex-Vampyre Squid Chancellor Rishi Sunak who hyped the already over-hyped deal with his comments on “sky-high growth”, and “dynamic business”.

There wasn’t much to like about the deal. The fact it would not qualify for the index because of the golden share structure leaving control in the hands of the founder – failing the Governance test, or the way in which it treats its gig-workers – failing the Social test.  Most big London funds used these excuses to back away. James Anderston, the soon to retire manager of Scottish Mortgage was “lukewarm” on the deal because of its slowgrowing market and overreliance on London.

I am going recycle something I wrote for CapX back way back in Feb on Deliveroo.. I originally entitled it: “Deliveroo – Just what is a pizza delivery firm worth?”

“The Deliveroo IPO (“Initial Primary Offering”) at a valuation around …. well anywhere from £5-£10 bln depending on whom you ask. Apparently attracting a new listing of such high calibre highlights the attractions of UK Finance Inc relative to Europe. It’s being hailed as a major Tech listing for the UK. Really? If the definition of Tech is ordering a bike delivered pizza online, then it seems a pretty low threshold.

The 8-year-old Deliveroo is riding high (pardon the pun) as a result of the pandemic – not everyone took lockdown as an opportunity to learn new cooking skills. It’s been taking over 6 million orders per month, distributing over £4.1 bln from food outlets in 2020, primarily in the UK, with Deliveroo taking up to 25% of that value in fees from the food providers. It claims rising repeat orders and steadily growing “user engagement” providing “a recurring revenue stream that grows over time” as the company says.

Yet, 8-year-old Deliveroo has consistently failed to post a yearly profit. (Note the deliberate emphasis on 8-year old.) That’s apparently ok – its prioritising growth over returns. Although revenues in the Pandemic year rose 55%, it still lost £224 mm in the last quarter! It remains to be seen just how resilient user engagement will be once the economy reopens – especially after D-Day (“Drunk Day”) April 12th when Pub Gardens reopen.

The whole proposition of Deliveroo and competitors like Just East is based around expectations the online food delivery market will continue to grow to infinity. Fantastic. What’s not to like or even question about Gen XYZ and their inability to feed themselves… And apparently it’s not about delivering them a pizza, but being able to collate data to target more junk food at them and lining them up for robotic drone deliveries tomorrow. (Always tomorrow.)

Let’s be brutally honest – the takeaway food sector has been around for years, and isn’t really that disruptive. There was a time, a long, long time ago when we walked or drove to the Chinese or Fish & Chip shop. Now Deliveroo picks up food from its own dark “editions” kitchens flipping out Micky Dees’ burgers or another brand’s Peri-Peri Chickens. Apparently Dark Kitchens – cheap and easy to run are a massive differentiator when it comes to the long-term returns from Deliveroo.

The company has done “tech”: “Frank” is its’ algo based on predictive tech to “efficiently” distribute orders based on the position of restaurants, riders and customers. Smart tech means they’ve been able to cut preparation time by 20% enabling everyone to get more delivery work, make more food, and get food faster. Wow.. (that’s a very unimpressed wow btw.)

Moreover, Deliveroo is also a classic case-study of 2020s finance. Call something disruptive, and no matter how base and blasé its business model is, it will soon be worth billions. Well… perhaps it’s time to step back and smell the coffee – from which ever high street shop you with it delivered from.

Just apply some simple tests – The Blain DuB-De-PreP test. (Say it fast – sounds better.) Deliveroo may be disruptive, but is it a Dull, Boring, Defensible, Predictable and Profitable stock? No. Its not.

Are there any barriers to entry into Deliveroo’s market? Nope. Anyone can deliver take-away food. Mini-cab drivers have been doing it for years. Now there are a plethora of other firms including larger, better funded firms like Uber Eats, Door Dash, and big ad spending Just Eats. All of these firms compete for clients with deals and advertising spend. All of them compete for delivery staff. All of them compete to get restaurants into their dark kitchens. In a market with room for maybe 2 competitors, Deliveroo is at number 3.

Are the risks limited? No, there are major extrinsic risk factors including health and safety, regulation, and market risk. In addition, delivery drivers are increasingly demanding better pay and conditions – which are being agreed by the courts. A business model founded on ripping off cheap Gig economy workers will fail when the courts mandate pension plans. To be fair, its delivery riders have been allocated stock.

Is Deliveroo in possession of a strong balance sheet? Can any firm which consistently fails to post profits be called strong? (Rhetorical question.) And just how dependent on capital markets conditions is the firm? If interest rates rise and the current tech bubble bursts then how is the firm going to attract the ongoing capital markets infusions it requires to cover up its long-term losses?

Let’s say it triples its market share, and keeps its cost base low and turns profitable next year? What stock multiple should it command? Something massive because it’s such a secure business, or some low to reflect the obvious weakness?

Nor can I get myself particularly enthused about Deliveroo’s management. If I was talking about a founder who fundamentally loved and understood the rich culinary history of the UK (in other words, someone focused entirely on delivering the best fish’n’chips or Curry), I might get it. But, Will Shu was an investment banker posted to London peeved at the lack of quality delivery options to Morgan Stanley’s Canary Wharf offices.

Looking at the rest of the board I’m not getting that strong governance and passion vibe – I’m seeing a firm providing junk food hits to folk who should be eating healthy, meaning food delivery firms as probably a fail on the S of ESG – Unless they can show me 80% plus of their revenues are organic salads grown by transgender cooperatives..?

All of which means… I’m not terribly excited about Deliveroo. But, having worked in Canary Wharf late into the evenings many times in the past, I can understand exactly why it might have seemed a good idea at the time..”

Five Things to Read This Morning

FT – Biden reveals $2 bln Infrastructure plan and big corporate tax hikes 

Bberg – Biden will usher in a new era of Industrial Policy

WSJ – America’s Imports are stuck just off Los Angeles

BBerg – Dealmaking booms in hottest Q1 for two decades

Thunderer – Deliveroo: how a British Tech success story failed to deliver

Have a great Easter Break!

Bill Blain

Shard Capital


  1. Bill –

    I always enjoy your blog. Two things. I am a partner at Bridgewater and would be interested in having you at one of our research meetings if you are interested. I am also very interested in researching the Blackboulder etf you mention above. Is it available in the U.S.? I can’t seem to find it.

    Look forward to hearing from you.


    Jim Haskel

  2. I’m a sucker too. I spent 5 minutes Googling for this great new fund. Dammit, I guess I’ll just have to do my own diligence and find these opportunities myself!

    • Hi Clayton
      Me and the boys’n’girls at Shard are going to do it for you…. Give us some time and we will come up with the perfect Economic Reality Fund!

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