DoorDash's Valuation Is Excessively Optimistic

Nov. 19, 2020 10:10 AM ETDoorDash, Inc. (DASH)4 Comments
Noah Wilson profile picture
Noah Wilson
1.33K Followers

Summary

  • The food delivery provider operates in a fast growing, huge addressable market.
  • Revenues have soared as a function of the shift in the way people eat.
  • The competitive landscape is vicious and nobody is earning economic profits.
  • The network effects DASH enjoys do not necessarily lead to economic profits.
  • The business model leaves DASH at the risk of being overthrown by a new entrant or current rival, meaning valuations are excessively optimistic.

Local food delivery logistics firm, DoorDash (NYSE:DASH), filed an S-1 statement in preparation for its IPO. In this article, we discuss DASH's business model, competitive landscape, and the network effects it enjoys. Ultimately, the business lacks, as we shall see, the conditions to earn economic profits within a reasonable period of time.

DASH Does Not Have a Moat

The business operates a two-sided market in which customers on the one hand and brick-and-mortar food businesses, mostly restaurants at this stage, use DASH's economic platform. As is typical with two-sided markets, merchants and customers experience network effects which the company hopes will result in economies of scale and significant barriers to entry.

Three core attributes drive value of network effects in digital platforms. Firstly, the threshold that has to be achieved in market share to break-even. Secondly, the quality of customer experience (CX) and the stickiness of the relationships created through the network. Lastly, how far the data generated by the networks helps service providers optimize products and pricing.

DASH customers enjoy faster delivery times as logistics nodes become denser with the addition of marginal merchants; merchants gain more data-centric insights and grow their market opportunity as marginal customers are added to the network. Merchants join the company's Marketplace, paying a fee, and take advantage of its services in order to reach more customers within their locale. Customers pay a delivery fee for orders, plus a separate fee, and any tip they leave. DASH also operates a membership program, DashPass whose goal is to increase customer loyalty and increase switching costs.

The success of Facebook's (FB) social network and Microsoft's (MSFT) operating system has led investors to take on faith the notion that the momentum driven flywheel of network-effects businesses leads to economies of scale and formidable barriers to entry, which

This article was written by

Noah Wilson profile picture
1.33K Followers
I'm an independent investor with experience trading forex, cryptocurrency and stocks. I'm particularly interested in tech and biotech stocks with a long term growth philosophy. Originally from the UK, I worked for Barclays bank in London for 10 years before moving to the East coast of England. I currently run several online businesses while writing about investment as a hobby. None of the views I express should be taken as investment advice and is purely my own musings on a stock's investment potential.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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