- December 21, 2020
- Posted by: Ramkumar
- Category: Mergers And Acquisitions
My Analysis of DoorDash IPO
DoorDash overnight transformed into a $60 billion valuation after its public offering, as investors are pouncing on board on the back of its impressive growth driven by the COVID19 pandemic. Its growth rates easily beat the growth numbers of its peers. Despite the above reasons, there is no justification for a higher valuation for DoorDash due to the following:
1) DoorDash’s IPO was stoked by a swiftly fading COVID-19 tailwind.
2) The company has no moat.
3) The valuation remains insanely high-priced.
At least Airbnb has some genuine competitive advantages in its industry compared to DoorDash. In this article, i provide my analysis of DoorDash IPO, why DoorDash is priced heavily by the investors, and if this speculative pricing is a warning to the impending global crash.
DoorDash Business Model
DoorDash commenced operations in 2013 when its founders started a website that advertised menus of restaurants in Palo Alto. To date, the company instantly connects nearly 400,000 merchants with 18 million customers and over a million Dashers in the US, Canada, and Australia. Since its start, many brick-and-mortar businesses have thrived under this model, with nearly a billion orders executed through the platform.
Doordash ran a profitable business during COVID19, as consumers leveraged Doordash’s platforms to get a frictionless shopping experience.
Besides the delivery aspect, Doordash’s other capabilities include customer acquisition, insight, analytics, payment processing, and customer support. Doordash has steadily expanded its market share to 50% of its relevant category, having grown market share from the likes of Uber Eats and Grubhub.
The business model opportunity is enormous, with $1.5 trillion consumed on food each year in the US, $600 billion spent on restaurants and food services; this rate of 40% has increased over time. Greater demand for convenience and enhanced logistics signifies that this number is on the rise.
Doordash estimates its unit value of consumer orders to be $33, of which $20 goes to the merchant, $5 for DoorDash, and the remaining $8 serving the Dasher.
It is no mystery that COVID-19 ravaged the restaurant industry by either terrifying people into staying away or public health measures from governments effectively closing down food and beverage service businesses.
However, their loss was the gain of food delivery companies such as Doordash. People who needed to eat from their chosen restaurants had to either order delivery or picked it up themselves.
Now, the urge to get out and socialize reduces people’s fear of the virus, as recent trips to shopping centers/malls have demonstrated. With COVID-19 on the way out and customers anxiously awaiting returning to normalcy where they can socialize at their favorite restaurants, the main demand driver for delivery companies like DoorDash will reduce.
My Analysis of DoorDash IPO – No Moat
Another factor to examine is that many eateries have decided to invest in their pick-up and even free home delivery options as the charges they pay to businesses like DoorDash for including them in their delivery service network. Additionally, the food delivery market has saturated with competitors such as Uber Eats and Grubhub, and there is nothing to distinguish them.
As long as you have adequate driver capacity, there is no space to make your food delivery service quicker than a competitor. Each one gets restricted by the exact speed limits on the roads, fuel prices, and vehicles. Food delivery is a too commoditized service, with no real value-add opportunities. Perhaps, the most significant headwind is that delivery costs and fees are approximately equivalent to a standard order for a 1-2 person household, so a $10 order will usually cost between $15 and $20 after fees and tip.
With restaurants frequently investing in their infrastructure to reduce Doordash fees and competition flowing in a highly commoditized industry, margins are razor-thin. Scaling might render some advantages that can enable apps to reduce their restaurant fees and momentarily gain an advantage over competitors’ food delivery offerings to customers. It might also reduce their subscription costs and delivery fees to customers and further gain an advantage over the competition.
However, these benefits will be unavoidably transient in nature and lead to a vicious race-to-the-bottom pricing war that will keep margins too tight and send some of these companies into bankruptcy.
Doordash currently has a -12% trailing twelve-month net operating profit after tax margin despite experiencing the colossal COVID-19 demand driver. While many IPOs begin with negative margins and scale their way into profitability, I do not see a viable pathway to meaningful and sustainable scaling benefits that will contribute to its bottom line.
Conclusively, this is not the sort of business model that presents itself to a long-term buy-and-hold approach necessary for substantial value investing.
My Analysis of DoorDash IPO –Valuation is Outrageous
Doordash generated $291 million in sales in 2018, on which it announced a substantial operating loss of $210 million. Revenues almost tripled to $885 million as operating losses approximately tripled as well to $616 million, with relative losses being nearly stable.
The actual breakthrough came this year as revenues tripled from $587 million in the first nine months of 2019 to $1.92 billion this year, yet operating losses narrowed significantly from $479 million to $131 million. Doordash has enormously grown market share in the space over the past few years and, now, controls a 50% market share. With Uber Eats buying Postmates, there is very limited consolidation and market share to be taken for DoorDash.
Additionally, similar to the work from the home phenomenon, the COVID-19-driven demand for food delivery will possibly have some lasting positive impact as people were introduced and became habitual to the benefits of having their preferred restaurant’s food brought to them.
Doordash’s S-1 filings noted that the growth rate in total orders to diminish in future years. Doordash would generate $190 million in EBITDA this year and has an Enterprise Value of $55 billion; this interprets a bizarre EV/EBITDA of 289.
When we value using EV/Revenue, Doordash will generate $2.9 billion in revenue at EV/Revenue multiple at about 19 and the EBITDA margin at 6.6%. While it will be challenging for them to increase margins and maintain their substantial market share because of the reasons given earlier in the post, yet assuming they can grow EBITDA margins to 10% (which is overly optimistic for this business model), the EV/EBITDA ratio would still be massive.
Here, the bullish case is that the revenue will continue to grow at a 20%-30% annualized rate in the future. Assuming that it is correct and Doordash grows its revenues at a 20% CAGR for the next half-decade to $7.2 billion and improve its EBITDA margin to 10%. EBITDA in five years would be $720 million, which would give the EV/5-yr EBITDA multiple “just” 76.4. That is way too high for a very commoditized business that now holds a 50% market share and will possibly have its main demand driver dying over the next twelve months or less.
My Analysis of DoorDash IPO – Final Thoughts
The valuation for Doordash at 15 times sales multiple for a business with potential low margins, with no moat other than scale, is outlandish. If we see its peers, the valuation looks elevated as well. Uber trades at $55 per share, as its sales were below 17% in the most recent quarter, although delivery growth came in at 124% with sales of the core mobility service down, of course.
With a market cap of around $53 billion, Doordash trades around 18.7x forward sales against Uber, valued at around four times annualized sales. Grubhub, in the process of being acquired itself, trades as at similar multiples, although its growth rates around 50% are less impressive, with margins typically coming in around break-even as well.
DoorDash is an impressive business and fares better than Uber, Grubhub, and Postmates. However, the current valuation does not justify the growth potential as the vaccine for COVID19 might be harmful to Doordash’s business prospects.