Learning Resources

Investor Does Fundamental Analysis on DoorDash (DASH) - Stock Analysis For Beginners

27 Aug 2021

Transcript

00:00 About DoorDash

This company priced their IPO at USD 102 per share. Just on the first day, the share price skyrocketed 85% to around USD 189 per share. The CEO of market research firm even called it "the most ridiculous IPO of 2020". Good ridiculous or bad ridiculous? Let’s see how this company is performing now.

Hey guys, I’m Alex. Welcome to Behind The Stock where I dissect company information and annual report to discover and identify investment opportunities for you. We upload new episodes every Friday! Make sure to subscribe and turn on the notification bell!

Today, let’s talk about the largest food delivery company in the US, DoorDash! They partner up with local restaurants to deliver meals to customers nearby. Basically like [Malaysia and Singapore's] equivalent of GrabFood, Foodpanda, and Deliveroo.

DoorDash was founded in 2013 by Tony Xu, Stanley Tang, Evan Moore and Andy Fang who are all Stanford alumni. During that time, food delivery platforms were very different from the ones we know now. Back then, they were only listing the restaurants. And the restaurants themselves had to arrange their own deliveries. So, a common problem that would always happen is that deliveries were slow and sometimes orders had to be cancelled. The demand was too high and the restaurant couldn’t cope with the deliveries.

So, in comes DoorDash. They started out as PaloAltoDelivery.com to test out a different model within Palo Alto. That’s because Stanford and other big tech companies like Apple are in that area. After getting a few hundred orders, the founders were like "hey, this works..."

They then rebranded to DoorDash and joined a famous startup accelerator called Y Combinator. By 2015, just two years after founding DoorDash, they were already serving over 18 cities across the US! One of the company’s secret sauce to their success is every full-time employee has to work as a Dasher aka DoorDash driver at least once every month. This means that the company is constantly receiving valuable feedback and they can continuously improve their service. Well, I think that’s genius.

Anyway, while it’s very impressive that they were able to grow so big so fast, they also did bump into some troubles along the way. Similar to others like Uber and Deliveroo, DoorDash has faced repeated lawsuits with regards to their drivers. Drivers were suing DoorDash for using the customer tips to subsidize drivers’ pay. Since then, DoorDash has changed their tipping policies. So now drivers receive all of their tipped amount.

Besides that, the San Francisco District Attorney also sued DoorDash for illegally misclassifying employees as independent contractors. Which means these drivers couldn’t be protected by labor law. They are not entitled to minimum wage, OT, unemployment insurance and other things. This has been an ongoing concern for some time. 

The turning point was when in November 2020, voters in California approved the application of Proposition 22 which states that, gig workers - like Dashers, for example - remain classified as independent contractors instead of employees. With that vote in favour of DoorDash and also the boom in demand for online food delivery due to the pandemic, DoorDash decided to go public. Their IPO debut was on 11 December 2020.

03:36 DoorDash Business Overview


Now let’s look at their business overview. Here’s how DoorDash makes money.

Commissions, delivery and service fees, their white-label logistics service called Drive, their premium subscription plan called DashPass and a catering service for other businesses called DoorDash for Work.

By the end of 2020, DoorDash had 450,000 merchants partnered up with them including almost all the 200 largest national restaurant brands in the US.

DoorDash had over 20 million consumers using the company’s services. They are available across all 50 US states, plus Puerto Rico, Canada, and Australia. The company estimates that they have over 50% stake in the delivery market.

04:17 DoorDash Growth

Now let’s take a look their growth. Definitely there is a huge and fast-growing market.

The food-delivery-as-a-service market has exploded over the last few years. Even before the pandemic, less people were cooking from home. In 2019, Americans spent USD 1.9 trillion on food and beverages. USD 600 billion from that, which is about 31%, was expenditure on restaurants. With the pandemic lockdowns, it has further created a market for food delivery.

DoorDash has grown aggressively to take advantage of this huge market opportunity, growing their market share from 17% in 2018 to 50% in October 2020. Currently, they have about 57% of market share.

Having more than half of the total market share is impressive so far. However, that’s still just a few tiny percent of the total addressable market. Just think about it, they have 20 million customers. The US population is maybe around 331 million. That’s about 6%. So, there’s definitely a HUGE potential for growth. Not to mention, plenty of international opportunities as well!

So, in terms of Alex Meter, I rate their growth as good.

05:30 DoorDash Moat

In terms of their strength or competitive advantage, I can see signs of network effect.

At the end of 2020, DoorDash had 450,000 merchants, 20 million consumers, and 1 million dashers on their platform. Currently with the largest market share in most of the largest metropolitan areas, new restaurants are attracted to use the DoorDash platform. Because they have more merchants on their platform, they can attract more new customers.

Since DoorDash is able to capture data from their users, they can use it together with their current market leader position to stay competitive. Looking at their Q2 latest earnings, revenue grew 83% year-over-year. Total Orders grew 69% year-over-year. Marketplace gross order volume grew 70%. Gross profit increased 101% and adjusted EBITDA increased 45%. So, looking at their current growth rate, their network effect is getting stronger and with their database, they can further expand.

In terms of Alex Meter, I rate their competitive advantage as medium to good.

06:34 DoorDash Risks

Now, as for the risks, one of them is the unstable growth after the pandemic.

Can DoorDash continue to grow revenue and market share aggressively in a more normal post-pandemic world? With people getting vaccinated and economy reopening, many are looking forward to dining out in restaurant. Demand for delivery services will most likely drop.

Those small restaurants will also probably discontinue using DoorDash if they can cater to dine in again. They get to cut cost and save on their profit margin. So, maintaining double-digit growth rate could be a tough challenge.

Besides that, it’s there’s also competition risk.

The first part to the competition risk is in the low switching cost.

The food delivery market is filled with competitors offering the same service which is cheap food delivery. Delivery time is about the same. There’s no unique or differentiating factor so, customers tend to switch around using different services. I mean as a food delivery user myself, I don’t care if it’s GrabFood or Foodpanda. I will go with whatever gives me a better deal. Which then might be hard for the business to turn profitable.

The other part is that the barrier to entry in this industry is low. They face many different competitors across the different verticals.

For example, DoorDash is currently only operating in the U.S., Canada, and Australia. However, Uber Eats is in 20+ countries. Uber is also scaling and growing quicker, so they might have a stronger network effect and gaining more market share.

Besides that, they’re also competing with suppliers. Long before DoorDash, already exists food deliveries like Pizza Hut, Domino’s, and more. To stay competitive, these chains can charge lower delivery or sometimes free because they have core businesses that generate profits. These suppliers can choose to not list on the DoorDash platform if they want to keep the profit.

Plus, add to the fact that food delivery as a business itself, the competition is tight for a few reasons. More or less the delivery time would be the same cause of the same speed limits, traffic, et cetera. The cost of gas, vehicles, labor are all about the same. So, if everyone is competing to keep their prices lower to attract customers, margins will keep getting smaller and smaller.

As mentioned in the intro, the CEO of a research firm called DoorDash IPO the 'most ridiculous of 2020' and 'holds no value' because they don't have a way to make money long-term. He summarised it by saying they lack profitability, have huge competition, and possibly lack demand post-pandemic.

In terms of Alex Meter, I rate their risk as high risk.

09:11 DoorDash Financial

Next on, let's look into the financial performance of the business. Their revenue is growing with a gross profit margin of more than 50% but they are currently making losses. Balance sheet wise, they have a net cash position with D/E at 0.07x which is pretty strong. And they do generate cash flow and free cash flow.

In terms of Alex Meter, I rate their financial as decent to good.

09:34 Like & Dislike About DoorDash

Here’s what I like and dislike about DoorDash!

I like that they were able to take on the full opportunity during this pandemic to grow fast and capture the market. This shows that the management team is agile and flexible to adapt to the challenging environment.

As for what I dislike, DoorDash is more like foodpanda where they only provide food delivery services. I would prefer if they were more like grab where they provide different services such as transport, payment gateway, groceries shopping, instead of just food delivery.

Another thing I dislike is that they are operating in a very competitive industry. There is low barrier to entry and low switching cost. Although they have a strong net cash position due to the fund raised from IPO, and they’re generating decent cashflow, with competition kicks in, the cash position might suffer.

So, after watching my analysis, would you add DoorDash into your watchlist?

Comment down below, do you think DoorDash should focus on being market leader in food delivery OR diversify to other relevant verticals?

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Till then, I’m Alex and goodbye!