Food delivery service, DoorDash, is planning a $25 billion IPO in December. Should you buy?
I see three reasons to avoid shares in this IPO:
- Its rapid revenue growth is not sustainable after the pandemic ends
- It faces fierce competition and has no moat
- Its corporate governance is shareholder unfriendly
(I have no financial interest in the securities mentioned).
DoorDash IPO Plan
DoorDash plans to go public in December and its market capitalization could top $25 billion, according to the Wall Street Journal. The pandemic has been great for DoorDash’s top-line growth — which more than tripled in the quarter ending September 2020.
With the exception of the June 2020-ending quarter, DoorDash — founded in 2013 — has been unprofitable for most of its existence. For the three months ended in June, DoorDash’s revenue hit $675 million and it earned a $23 million profit. DoorDash lost $43 million in the September 2020-ending quarter while revenue soared 267% to $879 million, according to its IPO prospectus.
Going public in December could be nearly perfect timing. After all, the Covid-19 pandemic has been fantastic for the food-delivery industry as restaurants around the world cut back on indoor dining. In 2019, off-premise food consumption rose to 50% — or $302.6 billion — of consumer spending on restaurants (up from 44% in 2009), according to the prospectus.
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The pandemic boosted that proportion — driving up DoorDash’s valuation. In 2018, the Journal reported that DoorDash’s private valuation was a mere $1.4 billion. In 2020, it soared to $15 billion and its IPO valuation is estimated at $25 billion, a 322% pop since 2018.
With news of possible Covid-19 vaccines being approved, investors may gain a clearer line of sight to the end to the pandemic — which could slash demand for food-delivery service. DoorDash’s prospectus notes that the company may “not continue to grow on pace with historical rates.”
Rapid Growth May Drop Post-Pandemic
Those growth rates could go even higher this quarter and next. After all, as the Wall Street Journal noted, a new wave of infections is hitting — sending more regions into lockdown. That could further increase demand for food delivery.
However, the economy could reopen by mid-2021 in the wake of “recent breakthroughs in vaccine development.” If that happens, DoorDash’s 2021 revenue growth could well be below 2020’s explosive rates. “Pent-up demand for nights on the town don’t work in DoorDash’s favor,” concluded the Journal
Fierce Competition, No Moat
Food delivery is an inherently unprofitable industry with low barriers to entry. As a result, there is plenty of competition. To be fair, DoorDash is the market leader — however that leadership has not conferred on it the ability to charge a price that exceeds its costs.
DoorDash has a substantial market footprint, connecting “over 390,000 merchants, over 18 million consumers, and over a million [contract delivery drivers] Dashers in the United States, Canada, and Australia,” according to its prospectus.
DoorDash has a big market lead. According to the Journal, in October 2020 it controlled 48% of U.S. food delivery sales — way ahead of Uber Eats (28%), GrubHub (15%), and Postmates (7%). A $2.65 billion merger of Postmates announced in July would give UberEats a roughly 35% share.
Publicly-traded companies in the food delivery industry all report losses. How so?
- GrubHub reported a negative net margin: about -7% in the last 12 months, according to Morningstar
- UberEats generated a negative segment adjusted EBITDA margin: -21% for the nine months ending September 2020, according to Uber’s latest quarterly report
- DoorDash’s negative net margin was -7.8% for the nine months ending September 2020, according to its prospectus
To be fair, DoorDash’s net margin has become less negative since last year’s -91%. But the company’s overall costs and expenses grew 92% in the last year which does not make a good case for costs going down significantly as the company gets bigger.
If the surge in demand caused by the pandemic is not enough to make the industry profitable, after the pandemic ends it is hard to see how prices — DoorDash charges restaurant commissions as high as 30% of an order, noted the Journal — will rise and costs will fall enough to make the industry profitable.
Unfriendly Corporate Governance
If you don’t like these apples, as a shareholder you will have no power to replace the people growing them.
That’s because DoorDash’s co-founders — Tony Xu, Stanley Tang and Andy Fang — will own shares with 20 times the number of votes as those wielded by common stockholders.
CEO Xu will have the right to vote on behalf of Tang and Fang and will have “significant influence over major decisions at the company, ranging from the election of directors to whether to sell the company one day,” noted the Journal.
Unless it can lower analysts’ growth expectations, DoorDash IPO investors could be left holding a rotting bag.