DoorDash IPO review

Facts about DoorDash IPO:

  • DoorDash is going public on 8th Dec’20 with a deal size of $2640 million.
  • The price per share ranges from $90 to $95.
  • The leading underwriters of the IPO are Goldman Sach and JP Morgan.
  • It will be listed on the New York Stock Exchange (NYSE) and trade under the ticker “DASH”.
  • It’s founded in 2013 by Stanford graduates named Tony Xu, Andy Fang, Evan Moore, Stanley Tang.
  • DoorDash also hires its own drivers who are popularly known as Dashers.
  • DoorDash has been connected to more than 390,000 merchants,18 million consumers,1 million Dashers across the United States, Canada, and Australia through their logistics platform.

DoorDash’s mission is to grow and empower local economies.

Business Model:

How DoorDash generates revenue?

Revenue from customers —

  • DoorDash charges service fees, it’s calculated as a percentage of the order subtotal. The service fees allow the company to cover a variety of costs, including technology development, marketing, and payment processing.
  • They also charge delivery fees. It depends upon the distance of travel and how far will a dasher delivers. DoorDash’s tie-ups with the restaurants in consideration, but the average delivery fee that they charge is $5 — $8 / order from its customers.
  • It also provides a “DASH PASS” to its customers which gives the ability to save money on delivery and service fees. The cost per DASH PASS is $9.99 per month. The customers will not have to pay delivery fees for orders above $12. But not all restaurants are part of this offer.

Revenue from restaurants —

  • DoorDash charges around a 20% fee from restaurants to be listed on its platform.
  • They also charge restaurants for their marketing and advertising on their App. To be on the top of the list of restaurants for a limited time, for pop up in advanced search, DoorDash charges commission.

Financials:

To date, the company has raised capital from various investors like SoftBank Vision Fund, Sequoia Capital, Kleiner Perkins, Temasek Holdings, Darsana Capital Partners, Khosla Ventures, and many others.

By looking at the above data we can gauge that DoorDash’s gross margin has increased but the net margin is still in negative territory. DoorDash has also predicted that growth is fueled due to COVID, which will be extinguished after COVID ends. More people will prefer to go out for meals, which will drastically reduce their sales.

Competitors —

DoorDash has majorly two competitors —

  • UberEats
  • GrubHub

DoorDash has the lead in U.S. market share among them, with 49% of meal delivery sales in September compared with Uber’s 22% and GrubHub’s 20%, according to analytics firm Second Measure.

What triggers the growth of DoorDash?

  • When DoorDash was first introduced, there were food delivery platforms but they were only listing restaurants, but it was the restaurant’s responsibility to deliver the food to its customers. This resulted in the inability of restaurants to deliver the food fast enough. DoorDash provided restaurants only the platform but also delivery person. Due to the increased level of convenience, the company was able to expand into new markets with lightspeed.
  • In the organization, they had a culture where every full-time employee has to work as a Dasher at least once every month. It helps management to create a constant feedback loop and allows the company to tweak the product experience wherever necessary.

What are the risk factors one should consider before investing in DoorDash?

We will categorize risk into two parts. The first part will cover risk related to the industry in which DoorDash operates and the second part will cover risk related to the company.

Sectoral Risk

  • The cost to switch between offerings is low. Consumers have a propensity to shift to the lowest-cost provider and could use more than one local logistics platform, independent contractors who provide delivery services could use multiple platforms concurrently as they attempt to maximize earnings, and merchants could prefer to use the local logistics platform that offers the lowest commission rates and adopt more than one platform to maximize their volume of orders.
  • There are significant seasonal fluctuations. Like there’ll be more orders from the consumers in winter, and less in sunny weather. The number of availability of Dashers has an inverse relation with the season. Generally, dashers decrease during periods of winter weather, but consumer demand during these times requires us to have more Dashers available to fulfill orders. During these times, we rely on incentive pay to attract sufficient Dashers to maintain the quality of our platform, which increases our costs.
  • Proposition 22 — DoorDash had spent $48.1 million to help pass Proposition 22 in California, which will exempt DoorDash from a state law that would’ve required them to treat their couriers and drivers as employees. It promises Dasher's guaranteed wages and health care stipends for the first time, but their continued independent contractor status means they will not have access to sick pay, unemployment insurance, and other worker protections to which employees are entitled. If all of the states started implementing the same rule, it’ll increase future expenses.
  • Delivery apps charge restaurants a fee, which is between 15% and 30% of their commission on every order. These fees put a large dent in restaurant profits, with most restaurants barely making any profit on delivery orders made through third-party apps. Instead, certain businesses have decided to set up their own delivery services using local couriers rather than delivery apps. While the delivery fees for customers tend to be higher than those on apps, the loss of a few customers is better than paying the delivery app fees. Since so many restaurants now can only service delivery due to pandemic restrictions, certain states have put a cap on how many delivery apps can charge restaurants. New York recently passed a law saying delivery apps can only charge up to 15% commission fees on orders and 5% for other processing fees in-app.
  • To date, DoorDash added a restaurant to its service without the restaurant owner’s knowledge or consent. California Governor Gavin Newsom signed the “Fair Food Delivery Act,” new regulations that will officially take effect on January 1, 2021. The law will require food delivery platforms to obtain an agreement from restaurants “expressly authorizing” them to take orders and deliver meals. Similar prohibitions have also been enacted in Louisiana, Denver, Colorado, and Tucson, Arizona and are being contemplated in other jurisdictions.

Specific Risk

Operational Risk

  • DoorDash warned of weakness in its reporting and accounting controls, which is very uncommon among companies seeking to go public. The audit of its 2018 and 2019 financial statements revealed the company did not have adequate processes and controls when it came to revenue to cash reconciliation, and it said it is trying to remedy that by hiring additional accounting, engineering, and business intelligence personnel.
  • Also, under the JOBS Act, they are considered as emerging growth company which reduces reporting requirements. They have to present only two years of audited financial statements and only two years of related management’s discussion and analysis in this prospectus, an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting and many others. They don’t have any long history of their operations which makes future outlook bleak.
  • There was an issue on May’19 where DoorDash confirmed 4.9 million customers, delivery workers and merchants had sensitive information stolen via a data breach.
  • DoorDash announced plans to change its pay model shortly after it faced criticism from people regarding their tipping. Suppose, the minimum wage is $7 which DoorDash has to pay to Dashers, and the tip received from the customer is $2. So instead of giving $9 to Dasher, the company used to pay only $7 and keep $2 in his pocket. This pay model change will impact its financials.

Financial Risk —

  • With the COVID-19 pandemic, we have experienced a significant increase in revenue, Total Orders, and Marketplace GOV due to increased consumer demand for delivery, more merchants using our platform to facilitate both delivery and take-out, and improved efficiency of our local logistics platform. The circumstances that have accelerated the growth of our business stemming from the effects of the COVID-19 pandemic may not continue in the future, and we expect the decreasing growth rates in revenue, Total Orders, and Marketplace GOV to decline in future periods.
  • DoorDash has a history of net losses. In the future, they expect their expense will increase and profitability will decrease.

Acquisitions made by DoorDash —

To date, Doordash has made three acquisitions:

  • Rickshaw — DoorDash acquired Rickshaw in 2017, a delivery, and logistics software start-up. Rickshaw’s tech platform was integrated into DoorDash’s Drive software management system.
  • Caviar — On August 1, 2019, DoorDash announced the acquisition of Caviar. Caviar provides a service specializing in food delivery from upscale urban-area restaurants that typically do not offer delivery, from Square, Inc.
  • Scotty Labs — The company acquired Scotty Labs in August 2019. It’s a teleoperation startup company that focuses on self-driving and remote-controlled vehicle technology.

Why DoorDash is going to IPO?

The capital raised through the public will be used as follow:

  • It’ll use general corporate purposes, including working capital, operating expenses, and capital expenditures.
  • They may use a portion of the net proceeds to acquire or invest in businesses, products, services, or technologies. Currently, they don’t have agreements or commitments for any material acquisitions or investments at this time.
  • They may use a portion of the net proceeds we receive from this offering to fund a $200 million pledge, as part of our Main Street Strong program, to support merchants, Dashers, and local communities.
  • The money raised through the public will not be going into fuelling a price war with the rivals, rather the focus is on the market expansion and their next billion-dollar project — Doordash Drive which will be at par with businesses like Walmart.

Future Developments:

  • DoorDash will provide kitchen space for the restaurant to focus solely on preparing delivery food (a concept referred to as cloud or ghost kitchens). It started its first ghost kitchen in Redwood City, CA in October 2019. Ghost kitchens are fully equipped kitchen facilities that can be used by restaurants and caterers to prepare delivery- and pick-up-only meal orders.
  • DoorDash has introduced a “self-delivery” option to the restaurants in the U.S., Canada, and Australia. This option is for those restaurants that wish to use their own in-house delivery staff. It’s a win-win situation for both, restaurants as well as DoorDash. Also, the new restaurant partners will receive a free trial of Self-Delivery for 60 days of commission-free.
  • It has introduced DashMart. It’s a new type of convenience store, offering both household essentials and local restaurant favorites to our customers’ doorsteps. On this, you’ll find thousands of convenience, grocery, and restaurant items, from ice cream and chips to cough medicine and dog food, to spice rubs and packaged desserts from the local restaurants you love on DoorDash.
  • DoorDash is exploring long-term possibilities for delivery, including autonomous vehicles. It has a testing partnership with General Motors’ Cruise and bought AV startup Scotty Labs for $5 million last year. It said it is also investing in research and development for drone delivery.

My takeaway on DoorDash IPO:

From my perspective, there is more risk in investing in this IPO rather than benefits.

  • DoorDash operates in an industry that has homogeneous products, so it’ll be very difficult for any company to differentiate itself from others. Currently, it’s competing with UberEats which already has a strong grip on the international market. So it’ll be much easier for UberEats to expand and grab a large market share.
  • Looking at their future plans, we can gauge that it’ll be competing with InstaCart, Amazon, and many other similar companies, which is still difficult to differentiate.

In short, there is no economic moat and generating profit in near future is really tough for a company.

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