DoorDash: Dash Away From The Growth And Focus On The Fundamentals

Summary

• Food delivery space has the following characteristics: Highly fragmented market, intense competition, and zero switching cost.
• DoorDash has no moat.
• No clear direction/strategy towards profitability.
• Valuations seem crazy as everyone seems to want a piece of the growth.

This year has been a rollercoaster ride with many unexpected twists and turns. Especially the startup ecosystem where less than 10% of digital-first businesses have witnessed unprecedented growth while many others have been pushed to the edge. One of the biggest beneficiaries of the pandemic is DoorDash, an American food delivery company founded in 2013. Taking advantage of the huge tailwinds from the statewide lockdowns DoorDash made the strategic move to go public. The company went public on 9th December 2020 under the ticker ‘DASH’ and raised approximately $3.37 billion. The stock performed extraordinarily well on the IPO day when DoorDash’s stock opened at $189.51, almost 86% above its book value.

DoorDash at a glance:

DoorDash currently has 18+ Million customers, 390,000 merchants, 1 million+ dashers.

This is my pitch on why DoorDash is a great company but not investable at such a crazy valuation-

1. Competition:

The food delivery space is highly fragmented and faces intense competition. With low ticket sizes, almost zero switching cost, and multiple competitors, food delivery is a hard space to operate in. But DoorDash has had some success in terms of overall market share. DoorDash's current market share is 50% of all delivery services, with Uber eats having 26% and GrubHub at number 3 with 16% market share. Significant change from 2018 when Doordash=17%, Grubhub=39% & Ubereats: 27%

No Moat:

Even with the highest market share in this space, DoorDash seems to have no clear competitive advantage. All the services in this space use the same “dashers” to deliver and thus face the same constraints. This has currently transformed this business into a pricing war, with the biggest loser being called the winner due to increased transactions. This has been commoditized, and not much real value add opportunities are left in this business. Alongside that, DoorDash claims to have expansion plans, but none of those seem to have materialized into any concrete revenue numbers yet.

Good growth but no clear path to profitability:

Overall Marketplace GMV number has also shown good growth rates. The pandemic has definitely acted as a catalyst for food delivery services: 1) With cities being under complete lockdown, a huge number of restaurants signed up to keep operations going 2) Keeping safety in mind, customers relied on services like DoorDash to fulfill their demands.

I do not believe that DoorDash will be able to keep this margin when the COVID-19 tailwinds still fizzle out. The space has also seen consolidation like-Uber Eats acquiring Postmates for $2.65 B and DoorDash acquiring Caviar in a $410 M deal.

The pandemic has acted as a catalyst but the overall contribution margins have been negative since DoorDash’s inception, and they don't seem to be getting significantly better. I believe that the last quarter profits are a short term phenomenon. I say this because the pandemic has made the restaurant industry very vulnerable and highly dependent on food delivery services as a whole. This has given DoorDash and other delivery services the bargaining power because their platform completes a majority of their transactions. But with the pandemic becoming manageable in the foreseeable future(i.e., Decreased lockdowns, vaccine rollouts, better healthcare systems), I don’t see any clear path to profitability for DoorDash.

Valuation:

I believe that DoorDash has been able to command such high valuations due to the current boom in private market investments. In the last couple of years, most investors have given growth rate priority over all other metrics. This roots from four key assumptions:

1. Oversimplification of profitability with scale: Assumption that businesses that do huge volumes can become profitable by tapping into a few levers.

2. Greater fool theory: In order to get winners many investors are willing to pay a high price. This means that if investors are compelled to make investments on the basis of how other investors might perceive it rather than on the company’s merit.

3. Deployment issues: With investment funds raising billions of dollars per fund cash has become a commodity in the startup ecosystem. This means that there is a lot more money than capable opportunities which leads to investors paying high prices for hot deals.

4. Winner takes all: Most investors(VCs and Growth stage) believe that scale can solve most of their problems as it will erode all other competition. This means that companies are willing to lose money in order to be competitive and make money raised their key weapon. This assumption has been justified by past startup successes like LinkedIn, Facebook, Amazon, and by the popularization of blitz scaling as a concept.

I believe that investors did recognize this back in 2017 when DoorDash raised a down round but definitely, they’ve turned the tables since then. Along with that retail investors have definitely pushed the price a lot up. I believe that there has been a dearth of growth in the year 2020 and thus everyone is trying to find their big bet. Hotshot IPOs like DoorDash have proved to be the best way for retail investors to be a part of the game.

Source: Capital IQ

DoorDash being a part of the hot tech IPOs has been trading at a fairly high valuation(even higher than its peers). I would say that from the comps analysis I expect the company to be 7x its current revenue and 6x its NTM. Thus, the valuation number would probably be between 60%-70% growth putting its valuation anywhere between $21 B in comparison to its $45 B current market capitalization. The good news is that the market seems to have recognized this and has responded to it. The current stock is trading near its 52-week lows since the IPO and I expect it to go down a lot more.

Still, there is hope: Strategy and opportunities-

Since its inception, DoorDash has been primarily focused on food delivery services, with the majority of its merchants being restaurants. This seems like a smart move for a couple of reasons:

1. Big opportunity: In 2019, Americans spent $1.5T on food and beverages, of which $600.5B was spent on restaurants and other food services, of which 50%, or $302.6B was consumed off-premise. DoorDash’s 2019 Gross Order Value (GOV) was $8.0B, implying a 2.6% market share for the off-premise segment.

2. Delivery times: Food delivery is a hard business as food is perishable, and individuals want their orders fulfilled as soon as possible. This has helped DoorDash push its limits and really aim for high efficiency in its supply chain. This leads us to the fact that once DoorDash has acquired a majority of this market, it would make complete sense to expand into other more lucrative markets using the same operational network.

“With increasing consumer adoption of technology-enabled solutions in every facet of modern life, we believe that there will be increasing demand for local logistics services by merchants in industry verticals beyond food. We have already started to serve merchants in other verticals, such as grocery”: S-1 DoorDash.

I believe that DoorDash has the power to leverage its highly effective local logistics ecosystem across different verticals. Not priced it in because they have shown no clear signs of entering a profitable market anytime soon.