DoorDash Inc. is poised for growth but must also navigate challenges of profitability and regulatory issues, experts said ahead of the food delivery company's public trading debut.
DoorDash is offering 33 million shares. The San Francisco-based company on Dec. 4 raised the expected price range for its IPO to between $90 per share and $95 per share from its previous range of $75 per share to $85 per share. DoorDash increasing its IPO price range indicates that there is strong demand from institutional investors who have bought into the story that with a growing market share, DoorDash will be able to dominate the delivery business, Jay Ritter, finance professor at the University of Florida, said in an interview.
The company would raise $2.96 billion at the midpoint of the new target range. At the top end, DoorDash could fetch $3.14 billion in the offering, giving it a valuation of about $30 billion, according to CNBC.
DoorDash declined to comment on its IPO.
Experts said DoorDash's growth has skyrocketed in recent months, fueled by people ordering more food as coronavirus restrictions keep them stuck at home. But the company has yet to post an annual profit and will continue to face issues including a growing push to classify its largely contractor-based workforce as regular employees. Even with those challenges, the company's shares will likely be attractive, experts said.
"DoorDash has been growing at an exceptional rate for many years, doubling or tripling every year for at least the past five years, in large part due to exceptional repeat buying. Even before the pandemic hit, customers who stay with the firm tend to place more and more orders over time," Daniel McCarthy, assistant professor of marketing at Emory University, told Market Intelligence.
DoorDash's current valuation is already pricing in a lot of continued growth, McCarthy said in email. "They have already penetrated a significant fraction of their target market here in the US, and new customer acquisitions were falling before the pandemic hit, so a lot of their value from here will be driven off of extracting more value from its existing active customer base. They have their work cut out for them to grow into this valuation."
Ritter echoed similar thoughts, saying the big question is how much is each repeat customer worth in the long run. At a valuation of over $30 billion, DoorDash’s market cap amounts to $100 for every American, he said. "Is the food delivery business going to be that big, and that profitable? Of course, DoorDash might be able to make money from delivering more than just restaurant meals."
The company has experienced significant growth amid the pandemic as the crisis increased demand for food deliveries.
"DoorDash has been rapidly increasing its market share in the food delivery business. The growth of the business has been supercharged this year by the COVID-19 situation, and it remains to be seen how much staying power there is to suburban families ordering big-ticket dinners for delivery, a segment that their competitors have largely failed to capitalize on," Ritter said.
Profitability, labor challenges
Like its gig economy peers Uber Technologies Inc. and Lyft Inc., DoorDash remains challenged by profitability, one of the key risk factors the company itself identified as potentially causing an adverse effect to business.
The company posted its first profit in the second quarter ended June 30 at $23 million before posting a loss of $42 million in the third quarter ended Sept. 30. DoorDash said it has narrowed its losses for the nine months ended Sept. 30 to $149 million from $533 million in the year-ago period. Its revenue over the same period rose to $1.92 billion from $587 million in the same period in 2019.
DoorDash reported a net loss of $667 million in full year 2019, wider than a $204 million loss in 2018. Full-year 2019 revenue rose to $885 million from $291 million in 2018.
"DoorDash also realized early on that growth in the platform as a whole would make the business more valuable to everyone involved — restaurants, drivers, and riders — so growing the platform would make already valuable customers even more so. They were not profitable before COVID because they were investing up front in acquire customers who would be very profitable in the future. This strategy has paid off handsomely, with a large base of regular customers and the biggest platform in the category," McCarthy said.
The company said it registered a significant increase in revenue and total orders due to the pandemic, but the circumstances that have accelerated the growth of its business may not continue, so it expects its growth rates in revenue and total orders to decline in future periods.
Financial services firm D.A. Davidson initiated its coverage of DoorDash with a Buy rating. Analyst Tom White said in his Nov. 30 initiation note that the Buy rating reflects the company's leading market position in U.S. online food delivery, strong recent share gains, and better-than-expected recent profitability trends.
"These positives, along with attractive adjacent opportunities in grocery/retail delivery and logistics solutions, outweigh near-term risks around likely slowing growth post a COVID vaccine and increasing regulation," White wrote.
Another risk factor relates to the independent contractor status of its delivery drivers. If DoorDash's drivers were classified as employees instead of independent contractors, its business would be adversely affected. DoorDash and other ride-hailing and food delivery services like Lyft and Uber in November won a pivotal ballot measure in California that allows them to continue classifying drivers as independent contractors.
"The timing of the IPO could not be more perfect. The business was healthy before the pandemic, but the pandemic has brought their growth rate from 100% to 200%. Prop 22, which had created a lot of uncertainty over their labor costs and business model, was ruled in their favor. They were profitable last quarter, and the IPO market has been hot lately. I think the IPO will be a big success," McCarthy said.
As a private company, DoorDash has acquired three companies. The company's acquisition portfolio includes autonomous driving startup Scotty Labs Inc. that it acquired in 2019, food delivery app Caviar Inc. and Rickshaw Inc., a same-day local delivery services for businesses.
Delivery market leader
DoorDash, founded in 2013, competes against other local food delivery logistics companies like Uber Eats, Grubhub Inc., which is merging with Dutch food delivery company Just Eat Takeaway.com NV, and Postmates Inc., which was acquired by Uber. The company launched its platform in Canada in 2015 and in Australia in 2019.
DoorDash held 51% of the U.S. meal delivery market in October, according to data analytics company Second Measure. In comparison, Uber Eats held a 23% share, while Grubhub had 18% of the market.
Until now, the company has raised about $2.6 billion in 10 disclosed funding rounds from investors, including SoftBank Vision Fund LP, Fidelity Management & Research Co. LLC, Sands Capital Ventures LLC and Sequoia Capital Operations LLC, according to S&P Global Market Intelligence data.
The company has applied to list its common stock on the New York Stock Exchange under the symbol DASH.