DoorDash’s (NYSE:DASH) prospects are cautiously optimistic as the company evolves from a food delivery player into an on-demand local commerce platform. Competitive risks however are very significant, particularly from Uber who arguably has a competitive advantage in the local commerce race. DoorDash currently trades at a higher price/sales multiple relative to rivals like Uber which may be indicative of investor optimism over near term prospects given DoorDash’s very dominant position in the food delivery space. However, Uber’s seeming long term competitive advantage makes DoorDash’s premium difficult to justify at this point. The stock could be viewed as a hold for investors willing to tolerate the risks.
Contents
Company Overview1H 2023: revenues up double digits, profitability improvesFinancialsRisksConclusion
Company Overview
DoorDash is an online marketplace platform that offers on-demand delivery services for a variety of needs such as food delivery, and package delivery. The company’s primary offerings consist of DoorDash Marketplace and Wolt Marketplace which together operate in over 25 countries worldwide. As of 1H 2023, the U.S. is their biggest market accounting for 98% of revenues and international markets account for the remainder.
1H 2023: revenues up double digits, profitability improves
1H 2023 revenues rose 36% YoY to $4.168 billion supported by continued increase in marketplace gross order value (GOV) which increased 26% in Q2 2023 and 29% in Q1 2023. Revenue growth outpaced marketplace GOV growth in both quarters (up 33% in Q2 2023 and 40% in Q1 2023) which management attributed to increased logistics efficiency. Operating losses narrowed to $382 million from $446 million and net losses narrowed to $331 million from $430 million.
Looking ahead, growth prospects are cautiously optimistic. Food delivery in the U.S. has room to grow considering online food delivery accounts for a single digit share of total restaurant sales in the U.S. according to DoorDash management. For perspective, food delivery accounts for roughly 25% of China’s restaurant sales according to some estimates. America’s online food delivery market is projected to grow at a CAGR of around 6% over the next few years according to figures from Statista. DoorDash, currently the U.S.’s number one food delivery platform by a wide margin (DoorDash’s 65% market share is double their closest rival UberEats’ 23%) is positioned to benefit.
The bigger opportunity however lies in grocery delivery, a considerably bigger market which DoorDash ventured into in 2020. Unlike food delivery, order values are generally higher for online grocery and with online grocery accounting for just around 11% of total grocery sales in the U.S. (compared with 19% for China in 2021), there is tremendous room for growth over the coming years. Online grocery is projected to grow at a CAGR of 18.8% over the coming years according to figures from Statista.
Not only could online grocery drive revenue growth, it may help improve profitability due to increased driver utilization as well as scale economies. Online grocery is a competitive market dominated by Amazon (AMZN), Walmart (WMT) and Instacart (CART) alongside numerous competitors including food delivery rival UberEats (UBER). Nevertheless, DoorDash appears to be gaining solid traction. Management mentioned in their Q2 2023 earnings call that “We’re growing faster than every other platform and gaining share dramatically in virtually all categories, and certainly—and very specifically—also in grocery.” and that “Over the last two and a half years, we’ve built a multibillion-dollar grocery business from scratch.”
DoorDash’s subscription program DashPass is seeing solid traction according to management with record subscriber growth in Q2 2023 after a 50% growth in 2022 when it reached 15 million subscribers. DoorDash is aiming to make its program as popular as Netflix and Amazon Prime (for perspective Netflix has 75 million subscribers in North America and Amazon has 168 million Prime members in the U.S), and their strategy of evolving into an all-in-one on-demand local commerce player spanning food delivery, grocery delivery, parcel delivery and more may support that ambition. In addition, it may give them a data advantage to carve out a niche in America’s growing retail media opportunity as well. The depreciation of third party cookies among other factors is driving retail media ad spend in the U.S. resulting in ad dollars shifting to retail media networks like Amazon. U.S retail media ad spend is forecast to more than double between 2023 and 2027, by which time retail ad spend is expected to amount to $106 billion, an enormous opportunity. DoorDash launched their ad business last October and a decent ad business could not only drive top line growth but could improve profitability as well given that advertising tends to be a high margin business.
Financials
Chinese on-demand delivery player Meituan whose business spans food delivery, grocery delivery, travel, ride hailing as well as advertising is profitable, which suggests a potential route to profitability for local commerce players like DoorDash. However, at this stage, DoorDash has just a few pieces of the ecosystem and is thus likely to remain unprofitable for the foreseeable future. Commissions charged to merchants (which range from 15%-30%) are in line with competitors like UberEats, and higher than Chinese counterparts like Meituan whose merchant commission are estimated at around 12% so further increases in DoorDash’s take rate may be difficult. Additionally, minimum wage laws that compel food delivery platforms to improve driver wages and benefits may lead to a deterioration in unit economics.
On the cost side customer acquisition and marketing costs are a significant cost driver and likely to remain so; approximately 25% of their revenues are spent on Sales & Marketing expenses, an amount that exceeds their General & Administrative expenses which account for roughly 17% of revenues. Given low consumer switching costs, a market positioning that, as of now, is still largely undifferentiated relative to rivals like UberEats, and stiff competition in the online grocery segment where DoorDash is trying to capture share, DoorDash may have to continue spending heavily to maintain growth.
DashPass may help improve the business’s economics if it drives more repeat customers, higher order frequency, and at higher average order values. Online grocery could be the key to this, in addition to the financial benefits from higher-margin advertising revenues the business could bring, but with consumers bombarded with an ever-increasing number of membership programs (some of whom arguably offer a better value proposition than DashPass) it remains to be seen if DashPass could capture a sufficiently large share of users to help DoorDash reach critical mass; DashPass’ $120/year membership fee is higher than Walmart’s $98/year annual fee but DashPass offers free shipping only on a minimum offer of $12 while Walmart offers free shipping with no minimum order. Barring a major change to their value proposition, at this point DashPass may be worthwhile for a time-constrained, relatively affluent customer base who order food on a regular basis and the program may be some years away before it can reach a level of popularity comparable to Walmart, let alone Netflix or Amazon Prime.
DoorDash may need to raise capital down the road; operating cash flows amounted to $1 billion over the past 12 months, however that includes $1 billion in stock based compensation. The company spent roughly $1 billion on share buybacks to offset that dilution so all in all the company is technically barely generating any positive cash flows. Factoring CAPEX of over $150 million last year, a figure that should grow as revenues increase, over $3 billion in the bank and no debt their cash burn appears manageable near term provided they make no substantial acquisitions. Medium term however, they may potentially need to raise further capital to fund growth barring a material improvement in business economics.
Risks
Competitive risks
America’s on-demand delivery space is evolving and due to low entry barriers DoorDash could lose its number one position in its core food delivery business to a new entrant in much the same way it overtook UberEats and GrubHub. Retail giant Amazon has tried entering the space before and TikTok parent ByteDance is a fast-growing food delivery player in China despite being a latecomer. If both these players or any other strong entrants enter America’s food delivery market, limited consumer switching costs mean DoorDash could be up against extremely formidable competitors, potentially impacting the latter’s growth prospects and financial performance and hinder the company’s ability to turn profitable.
On the operational side, Uber, who is also evolving into a local commerce player in their own right, is arguably better positioned due to better driver utilization thanks to their dominant position in ride-hailing. Uber drivers can offer ride hailing, food delivery, and grocery delivery using the same vehicle giving drivers opportunities to earn more for a given work period and for Uber to generate more business. Uber may also be better positioned to navigate minimum wage laws as a result. Southeast Asian ride-hailing giant Grab’s (GRAB) interest in buying out food delivery player Foodpanda’s Asian operations may be indicative of this advantage (according to Grab, “Driver-Partners” who do both ride-hailing and deliveries can earn as much as 2x for the same amount of time online). It is worth re-iterating that Meituan, also profitable, also has a ride-hailing business. Additionally, Uber’s newfound profitability further increases competitive pressures on DoorDash as the former now has internally-generated cash at their disposal to fund expansion into new verticals towards becoming a local commerce player.
Conclusion
DoorDash has a moderate buy analyst consensus rating. Seeking Alpha’s Quant system meanwhile rates it a hold.
DoorDash has some growth left ahead. Profitability is likely to remain elusive for the foreseeable future but their long term strategy to transform into an on-demand local commerce player has merits and could lead to profitability long term provided execution remains decent. Limited consumer switching costs and competitive pressures however may limit financial performance.
DoorDash’s forward Price/Sales of 3.69 is higher than the sector median of 0.85 and higher than rivals like Uber and Meituan. Given Uber’s apparent competitive advantage in what could possibly be a winner-takes-most local commerce race, at this stage DoorDash’s multiple appears pricey and their near term prospects are likely baked in. The stock could be viewed as a hold for investors willing to tolerate the risks.
