Late last week San Francisco-based DoorDash released its initial public offering (IPO) filing alongside some impressive financial figures. The timing certainly seems right given the recent surge in food delivery demand during the pandemic. But looking beyond the current economic climate, a lasting consumer appetite for convenience and increasing restaurant adoption suggest DoorDash will be a winning growth stock.
What Does DoorDash Do?
DoorDash partners with restaurants to help get their food into the hands of hungry Americans everywhere. Its restaurant base has grown to more than 300,000 businesses to which DoorDash offers full-service logistics including real-time order updates and GPS order tracking. Alternatively, restaurants that already have a delivery team can still tap into Door Dash's order generation tools.
DoorDash is to food delivery what Uber and Lyft are to taxi service. Pizza, sushi, Asian cuisine, Mexican food, and even dessert is just a sample platter of what can be summoned from the DoorDash app.
The company hires an army of "Dashers". These couriers use their own vehicles to deliver within an expansive 25-mile radius of the restaurants. The value proposition for consumers includes DoorDash's vast menu options and the ability to stay put and receive food in an average delivery time of 37 minutes.
Is DoorDash Profitable?
DoorDash makes money by charging restaurants commissions on customer orders. This can amount to as much as 30% of order value.
It showed an unexpected profit in its IPO filing that helped spice up its pre-debut buzz. Although it slipped back into a net loss in the third quarter, profitability was achieved in the previous quarter. DoorDash posted a $23 million profit on $675 million in revenue in Q2.
The company has been growing rapidly this year amid consumer preference to shun dine-in experiences in favor of home delivery. Sales for the September end quarter more than tripled to $879 million year-over-year, although the bottom line was in the red by $43 million.
DoorDash forks over a lot of money to get the word out about its business to both consumers and restaurants. Look no further than last quarter's 74% increase in sales and marketing expenses.
Naysayers may point to the second-quarter growth as an anomaly and highlight the fact that DoorDash has yet to turn a full-year profit since its inception seven years ago. But while squeezing out profits in the food-delivery space has historically been tough, DoorDash's torrent growth pace and flash of profitability suggest it may be blazing a new trail.
What are the Growth Catalysts for DoorDash?
Convenience is at the core of DoorDash's business model—and is also the force behind future growth. With or without a pandemic backdrop, Americans are craving the convenience (and relative safety) of food delivery.
The DoorDash app already reaches 80% of American consumers. This includes a broad scope of millennials, parents, and other people that lead hard-working fast-paced lifestyles. Corporate customers also represent a key growth segment because they typically place larger orders.
The selling point for restaurants is that a DoorDash partnership eliminates overhead expenses and can result in profits of as much as 60% on incremental orders. Restaurants that have their menu featured on the DoorDash app benefit by tapping into new customers that don't visit its physical locations. According to the company, over 90% of DoorDash orders come from brand new customers.
Going forward, growth is likely to moderate from pandemic levels as the company has recently presaged. But as economic conditions theoretically normalize, the new normal will likely include a carry-over of food-delivery demand—and make DoorDash more than just a flash in the frying pan.
Growth is also expected to come from DoorDash's ability to think outside the bento box. Its "Delivery Everything" initiative is geared towards morphing the company into a deliverer of all things consumer. Recent grocery, clothing, and pharmacy delivery partnerships scratch the surface. Imagine being able to order a burrito along with a side of Tums. Life is good.
Should Investors Buy DoorDash?
While much of the conversation around DoorDash relates to the restaurant industry, it's important to remember that it is a technology company.
Therefore, the company's long-term success will be its ability to not only grow its customer base but to enhance the capabilities of its platform. This means DoorDash will have to walk the fine line of keeping its app simple and user-friendly while also introducing new value-added features for restaurants and consumers.
The recent vote in California that did not require DoorDash and other freelancer-dependent business to classify workers as employees was a major boost. More favorable rulings in this regard would drastically support DoorDash's cost structure. With this said, however, regulatory uncertainty in other states represents an ongoing hurdle—and a big risk factor for investors.
The DoorDash IPO is expected to command a valuation north of $25 billion when the stock starts trading around mid-December. The company will be listed on the NYSE under the 'DASH' ticker.
DoorDash will come to the market with a boatload of cash thanks to hefty investments from private investors. This should give it the flexibility to expand further into the U.S. food-delivery market and cement its position as the country's top food-delivery service. In recent months, DoorDash has distanced itself from competitors like Uber Eats and Grubhub with a 50% market share.
Overall, a strong market position, favorable consumer eating trends, and improving financials point to the potential for sustainable profitability down the road. However, the rich valuation out of the gates is reason for investors to seek a better entry point. Once the euphoria simmers down and the stock has a post-IPO correction, traders should be looking to sprint into DoorDash.
