DoorDash’s blockbuster IPO has caught many investors’ attention - for good and bad reasons.
When DoorDash (DASH) hit the public market earlier in December 2020, the stock skyrocketed to closed at +86% relative to its IPO price. At the time of writing, it commands a market cap of ~$53 billion!
To put this in context, Doordash is >50% of the entire Uber, and almost 7.5x Grubhub’s market cap. Massive!
In this article, we aim to build an understanding of DoorDash’s business. We look at how does DoorDash make money, what makes DoorDash different, valuation and its business model. Finally, we hope to answer whether one should invest in DoorDash.
What is DoorDash?
DoorDash is a U.S. based food delivery service launched in 2012 in Palo Alto, California. DoorDash operates in the US, Canada and Australia.
As of January 2020, DoorDash is the market leader in food delivery in the country, capturing 33% of the market. This is closely followed by Grubhub at 32%, Uber Eats 20% and Postmates (bought by Uber in July 2020) at 10%.
The acquisition of Postmates by Uber meant that all Grubhub, DoorDash and UberEats are neck-to-neck on being the market leader.
How does DoorDash make money?
Like many typical food delivery services company, DoorDash focus on point-to-point delivery from its merchants (restaurants) to its end customers (like us) via Dashers, or food courier.
Similar to most food delivery companies’ sources of income, DoorDash derives its revenue stream via delivery and service fee. DoorDash also charges a commission from restaurants, effectively taking a margin on its food.
In addition, DoorDash also runs a subscription service, currently priced at $9.99 per month, where its offers free delivery on all orders over $15. This pretty much sums up not only DoorDash’s business model, but the typical business model of food delivery companies.
What makes DoorDash different?
To be honest, we find differentiation in this sector extremely subtle. During the early years of its founding, DoorDash focused on restaurants that primarily do not already have a delivery service capabilities. Over time, this expanded to every other restaurants and pivoted towards a more sales-driven model, in our view.
While DoorDash prides itself on being a logistic and tech-driven company that manages delivery capabilities for restaurants, we find the product differentiation minimal from an investor’s point of view.
Based on its S1 filings, DoorDash boast connection of >390k merchants, with >18 million consumers, and >1 million Dashers (food couriers) in the United States, Canada and Australia.
For what it’s worth, from an order size perspective, DoorDash (and Postmates) could be still reigning in the larger order segment, as depicted in the chart below. While this info is may be dated, it could point towards DoorDash’s strategy of targeting the larger order market, perhaps preferring volume over margin.
The food delivery sector
The food delivery sector has made significant strides to how we consume food today. From groceries to ready meals, food delivery companies not only provide utility and convenience to its end-customers, but also open up a sea of opportunities for restaurants to reach its customers.
The recent unfortunate event of Covid-19 has further perpetuate the importance of food delivery. For example, Uber Eats recorded gross booking growth of 134% in the third quarter of 2020. Investors cannot deny the growth potential of the sector.
But, here’s what we think investors should be asking – what value does multiple food delivery services add in the sector? In a sector, where none of these companies are profitable, we have to question if there’s a “secret sauce” that one of these companies possessed that would be an outright winner.
So far, we haven’t found anything convincing. In fact, we wrote about this before in our article on Uber.
Here’s a breakdown of an NYT journalist who ordered two turkey sandwiches from a nearby Subway, via the various food delivery apps.
While this is just one example, it’s clear to see that none of the business models have significant competitive edge. It’s also worth mentioning that the mark up is indeed significant, even for GrubHub.
Is DoorDash profitable?
At the time of writing, DoorDash has yet to turn profitable. As per most pre-profit companies, cost of revenue and sales & marketing remain the two key cost drivers.
While Sales & Marketing is essentially to maintain brand affinity, DoorDash has showed some encouraging signs of its path to profitability. Evidently, this is through lower cost of revenue to revenue ratio, 46% (9 months 2020) relative to 59% in 2019.
The big question is how the market is valuing DoorDash. Currently trading at a market cap of ~$53 billion, this is >3x its last private valuation, less than 18 months ago.
According to Forbes, this implies at 37% compounded annual revenue growth for the next 11 years! This is challenging to take in for starters. Additionally, this also implies DoorDash will grow its share of global food delivery to 64% from ~16%. At present, its valuation is extremely optimistic, to say the least.
Citron Research, a famous short-seller, compared the Enterprise Value to Sales (EV/Sales) multiple for its peers. The famed short-seller added that at 4x EV/Sales multiple, DoorDash should be trading close to $32, relative to $166 today, ~80% downside.
While we acknowledge that not all company are created equally, a significant deviation from its peers is possible if it has a significant competitive advantage, something we have not seen any evidence of.
To loosely paraphrase Peter Parker’s principle in the movie Spiderman.
“With great valuation comes great expectation”
We find the prevailing DoorDash valuation difficult to stomach, regardless how we cut it. Consequently, we see DoorDash as a growth business predicated on volume with little competitive advantage.
Furthermore, with technology infrastructure readily available today relative to 10 years ago, we see the argument of a significant barrier to entry weakened over the years.
Having said that, there are other verticals that DoorDash can consider to realize greater value for the company. However, we are cautious not to give credit for companies who operate in a fresh and yet unproven business model.
As a result, fundamentally and from a top-down perspective, DoorDash’s story differs very much from a company like Peloton.
In short, owing to the unfathomable valuation, we’re gonna give this investment opportunity a dash.