DISCLAIMER: This newsletter reflects my opinions and should NOT be considered investment advice. I do my best to ensure the accuracy of information included in the newsletter at the time of writing, but these companies and markets change rapidly and I make no promise to the timeliness, or accuracy, of the information presented. Investing in equities mentioned in this article carries risk, including the loss of principal. Please do your own research.
Summary
DoorDash competes in a hyper-competitive market for the delivery of goods from local businesses, with a primary focus on restaurants (TAM $302.6M)
DoorDash earns a “substantial majority” of its $2.9B in revenue as a percent of Gross Order Value on its Marketplace; but also earns per-order fixed fees for its Drive business, and subscription revenue from DashPass
Demand for the product has skyrocketed during the pandemic leading Doordash to its second consecutive year of 200% GOV growth; it forecasts $30B-$33B in 2021 Marketplace GOV or 30% growth YoY
DoorDash appears to have very healthy unit economics and aims for $0-200M in Adjusted EBITDA during 2021. Long-term there’s significant uncertainty with the level of profitability it can sustain in such a competitive market.
Market
Customer
DoorDash is a platform that enables local brick-and-mortar businesses to thrive in today’s convenience economy by addressing consumers’ expectations of ease and immediacy. With over 900 million orders completed through the platform since its founding, merchants have made additional sales, consumers have connected with the best of their neighborhoods, and Dashers have found flexible work opportunities. In December 2020, DoorDash connected over 450,000 merchants, 20 million consumers, and 1 million Dashers in the United States, Canada, and Australia.
Merchants - local brick-and-mortar businesses that want to offer delivery
Consumers - individuals who was fast, easy access to their local businesses
Dashers - Gig economy workers offering delivery services on behalf of DoorDash
Market Size
DoorDash claims to be the category leader in the marketplace for local delivery services. U.S. consumers on the platform in September 2020 represented less than 6% of the U.S. population, and they believe they are in the early phases of broad market adoption. In 2019, Americans spent $1.5 trillion on food and beverages, of which $600.5 billion was spent on restaurants and other consumer food services. Spending in this category has shifted in recent years towards off-premise consumption, increasing from 44% of food and beverage spend in 2009 to 50%, or $302.6 billion, in 2019. DoorDash Marketplace GOV in 2019 ($8B) represented less than three percent of this off-premise spend, highlighting the large addressable opportunity ahead of them in the food vertical alone.
However, while DoorDash grew up as (and derives the large majority of current revenue from) a delivery service for restaurants. They are rapidly transforming into an all-purpose last-mile logistics platform that will deliver all goods from local businesses including grocery and convenience stores (a $688B US market).
Competition
DoorDash faces immense competition within the food delivery category, and as the market matures, it’s become clear that their last-mile logistics platform will compete head to head in adjacent categories with some of the largest businesses in the world. First, let’s discuss their head to head competition in food delivery, where they’ve rapidly gained in share over the last few years:
Since January 2018, DoorDash grew from 17% of the local food delivery market to 50% of the food delivery market primarily taking share from Grubhub (Just Eat Takeaway) and Postmates (Uber) who have both been acquired as a result. Today, 3 main players remain in the restaurant delivery space:
DoorDash - 50% US market share
Uber - 42% US market share; across UberEats & Postmates delivery brands
Just Eat Takeaway - 7% US market share; stronger European presence
Then there is Instacart, the grocery-delivery company that recently raised a private funding round at a $39B valuation ahead of a highly anticipated IPO slated for later this year. Doordash has a stronger point-of-sale integration for restaurants, which differentiates the service for now; but with new funding, and DoorDash/Uber rapidly expanding into convenience stores, I feel it’s inevitable that Instacart fights back.
Beyond last-mile delivery services, chain restaurants led by prominent pizza companies like Domino’s, have opted to build their own ordering platforms and manage logistics in-house. Doordash provides a broader selection of cuisine, a loyalty program, and single login; giving them an advantage over any individual brand. Still, they probably won’t be able to displace in-house ordering platforms for die-hard fans.
Finally, the mother of them all, Amazon continues to crush delivery times from weeks, to days, to hours. With Operating Cash Flow in excess of the Market Capitalization of most of these last-mile delivery businesses, expect Amazon to compete ruthlessly in real-time last-mile logistics. More importantly, with incredibly profitable business lines in AWS and Ads to subsidize their efforts in last-mile delivery, expect margins to be… minimal.
Unit Economics
Business Model
DoorDash earns money as a percentage of Gross Order Value (GOV). GOV is the total dollar value of Marketplace orders completed on our local logistics platform, including taxes, tips, and any applicable consumer fees, including membership fees related to DashPass. To illustrate this flow of money, here is an example of payments and fees for a single Order on DoorDash:
As you can see in the example, Doordash generates Revenue by charging a fee to both the merchant and the consumer. These fees are first used to pay the dasher fulfilling the delivery, and the balance is retained as Revenue for DoorDash. In 2020, DoorDash had a take rate (Revenue / GOV) of 11.7%, up from 11.0% in 2019, and 10.4% in 2018.
DoorDash also has a business line that they refer to as “Drive” in which they fulfill delivery orders on behalf of large national chains including Wing Stop, Chili’s and Pet Smart. In these cases, DoorDash doesn’t receive the value of the food or merchandise it delivers, but instead collects a fixed-fee that’s negotiated with the merchant in advance. Drive, therefore, is excluded from Marketplace GOV, but included in its Order and Revenue totals. Increased adoption of this product by merchants may cause Marketplace GOV to become a less important metric over time.
Finally, DoorDash recognizes Revenue for its subscription product DashPass. Paying for DashPass eliminates delivery fees for selected businesses on DoorDash, and provides incentive for the consumer to shop within the DoorDash ecosystem.
According to its 2020 10-k filing, Doordash generates “a substantial majority” of its Revenue from Marketplace Fees, but I haven’t seen numbers quantifying the size of DashPass or Drive yet.
Demand
In 2020, demand for DoorDash surged during the pandemic. The company generated $24.6B in Marketplace GOV, an increase of over 200% from 2019. The question on everyone’s mind is whether pandemic demand will translate into long-term customers, or a once-in-a-century peak in DoorDash usage.
In September 2020, DoorDash reported “over 18M consumers” on the platform, and in their 10-k filing they reported “over 20M consumers” in December 2020 reflecting 2M net-new consumers acquired during the period. During the same period they reported 273M total orders, which suggests that the average user orders 4.5 times per month (273M total orders / 20M active consumers / 3 months).
I don’t think there’s a great way to model 1-year and 3-year LTV because 2020 order frequency has been elevated during the pandemic; but, we’ll do our best here.
Let’s assume, for the sake of argument that in a normal environment the average user was ordering 3 times per month. With an average order value of $30/order ($24.6B / 816M orders), annual revenue per user would be ~$130 (36 orders * $30 average order value * 12% take rate). Based on the retention data presented, Year 1 revenue would be a little less than that, and Year 2 and Year 3 would be a little more, but let’s just call it a $390 3-year LTV.
If we only account for the net-new consumer addition of 2M in Q4 2020, and fully weight it with $347M in Q4 marketing spend minus ~$35M in one-time SBC related to the IPO, we’d end up with ~$150 CAC. That works out to a payback period of just over 1-year, and a 3-year LTV:CAC ratio of 2.6x.
This is an extremely conservative definition, though. If you look at their cohorted data, DoorDash claim to spend 10% of Marketplace GOV generated by customer’s in Year 1, consistent with the 1-year payback period claimed above; but just 2% of Marketplace GOV in Years 2 and beyond:
Supply
Doordash manages logistics for over 1M Dashers fulfilling deliveries from 450k Merchants. Dashers join the platform to generate income flexibly, on their schedule. Merchants join the platform to focus on their food, find new consumers, and deliver a effortless ordering experience.
While Dashers are a fundamental part of the DoorDash experience, there is, quite frankly, little that differentiates them from a gig worker on Lyft, Uber, or Postmates. While I am loosely familiar with Prop 22, and the ongoing legal battle to protect the independent contractor classification for many workers, the legal risks for DoorDash aren’t unique to their company. In a future newsletter, I’ll do a deeper dive on California’s gig-economy legislation and what it means for all of the labor marketplaces I plan to cover.
Merchants have a love-hate relationships with delivery services like DoorDash. As a low margin business, giving a 20% cut of revenue to the delivery service can squeeze even great restaurants. To prove its value to the restauranteur, DoorDash is investing heavily in tools to make it easier to run a digitally enabled-restaurant including:
Tablet and/or Point-of-Sale Integration - regardless of the size of the restaurant Doordash will provide the software needed to receive and dispatch orders.
DoorDash Storefront - a white-label e-commerce service allowing restaurants to build a website without investing in engineering.
In total, DoorDash merchants have generated over $19B in sales during its history and in 2019 saw same store sales growth of 59%.
Valuation
Price
At the end of 2020, DoorDash had just over 320M shares outstanding. Since its December IPO, shares have traded as high as $256 and as low as $121 valuing the company between $39B and $82B. Shares currently trade a bit above $150, and the company had $4B in cash on its balance sheet, implying a roughly $45B enterprise value. Let’s put that in perspective:
1.8x EV / 2020 GOV ($24.6B)
15.5x EV / 2020 Revenue ($2.9B)
$100k EV / 2020 Merchants (450k Merchants)
$2,250 EV / Consumers (20M)
$45k EV / 2020 Dashers (1M)
Growth
DoorDash has grown revenue in each of the past 2 years by over 200%. The question for this year isn’t if its growth will slow, but by how much. In their first earnings report as a public company, DoorDash announced Marketplace GOV guidance for 2021 of $30-33B, representing annual growth of 20-30% from 2020.
Profitability
As of December 31, 2020, DoorDash had $4.5B in net cash on its balance sheet, including $4.8B in cash and marketable securities and $0.3B in convertible notes. DoorDash generated $252M in operating cash flow during 2020, but also took $322M in stock-based compensation (SBC) charges during the same period and invested $150M in property, equipment and capitalized software.
Gross Margins lag peers at just 53%, but have steadily improved over the last 3 years from just 22% in 2018. I haven’t found any promises around long-term profitability, but the CFO guided to between $0 and $200M in Adjusted EBITDA during 2021 as they continue to reinvest in growth and point of sale technology benefitting Merchants.
Since 2018, Sales and Marketing Expense (excluding SBC) declined as a percentage of revenue from 45% to 33%, reflecting operating leverage in the business. The same goes for R&D (13% to 5%) and G&A (24% to 13%) Operating Expenses.
Color Commentary
I’m just going to admit it, I came into this S1 teardown with a preconceived opinion of the profitability and long-term sustainability of food delivery. As evidence, I give you one of my most liked Facebook statuses from 2016:
I'm not exactly sure what the economic indicators of a "tech bubble" are, but I'm pretty sure getting a single quesadilla delivered on bicycle from across town for $3 is not an efficient allocation of resources.
That year I was working at a start up making very little money, and took every advantage of food service referrals on DoorDash, Postmates, and UberEats. I’m pretty sure I went a solid month eating my way through my referral credits (and the Series A funding) for local Chicago start up EatPurely.
After reading through this S1, I have to admit that I was dead wrong. Doordash is a large, rapidly growing business with 20M consumers using the service once a week. When a successful acquisition leads to that level of stickiness (and LTV), you can spend a lot of quesadillas acquiring customers and still breakeven. The question that remains is whether the business can outlast its fierce competition and generate cash to warrant its $45B enterprise value. Here are some of the factors I’m thinking about:
DoorDash faces competition on all sides. Uber, Instacart, Amazon. It’s hard to imagine a trio of better capitalized businesses whose shareholders are willing to underwrite slim-to-nonexistent margins for the indefinite future in order to capture market share. Each has their own starting-point:
Amazon has 200M prime subscribers and a global fulfillment network already doing same-day delivery for many of its most popular goods
Uber has a diversified business across Eats and Ridesharing, allowing them to utilize the same pool of gig workers across two vectors of demand
Instacart has a grocery-first platform with higher average order values and strong retail partnerships forged against a common enemy (Amazon)
DoorDash is restaurant-first and is building a technology platform that allows local restaurants and businesses to compete with national chains
Is DoorDash positioned to compete with these behemoths on their own turf? Or is DoorDash’s restaurant-tech and merchant relationships a strong enough moat to protect the core restaurant business? To underwrite an investment you need to believe one of these stories.
Will key competitors die off, or perpetually suppress profit margins? Even if DoorDash ends up as the winner in the last mile delivery category, it will be difficult to expand margins until it has literally driven the competition out of business. It’s pretty clear that all the competitors mentioned above are playing to be the last one standing, and willing to compete on price to put their competitors out of business. Once they are the only player remaining, they can modestly increase price and capture a reasonable margin from a huge market. The risk, here, is that the market never consolidates and there isn’t a winner-takes-all outcome. If that happens, you’d end up in an oligopoly market structure with intense price competition similar to the airline industry.
Is restaurant delivery differentiated enough to warrant its own platform? I have gone back and forth a lot on the market definition for DoorDash, and how that market definition relates to its ability to drive margin expansion. Its easy to lump the entire category of last-mile delivery together and assume that a single player, or small group, delivers everything from groceries, to take-out, to flowers, liquor and pharmaceuticals. However, there are nuances to each category that require slightly different product experience, relationship management, and expertise. For food delivery, timeliness (keep the food hot!) and best-in-class integrations with restaurant POS systems matter, but these features provide little-to-no value in adjacent delivery categories. In short, are the needs of a local restaurant the same, or sufficiently different, from the local florist or grocer? Are these differences worth paying 2-3% more for, or will price always win out? The larger and less differentiated DoorDash’s market definition becomes, the more competition it will face, and as a result the lower its long-term margins are likely to be.
Can you imagine DoorDash getting to 30% EBITDA margin over the long term? Hopefully, by now it’s clear that the major investment risk that I’ve identified in DoorDash is its ability to maintain its fee structure when revenue growth has finally slowed and the business is ready to throw off cash. At this point, does a race to the bottom commence, or is DoorDash able to maintain a healthy business supported by loyal merchant relationships? If DoorDash can generate long-term margins in line with the guidance from other marketplaces (like Rover & Airbnb), this is what a positive 5-year outcome could look like:
60M Active Consumers (currently 20M)
x 4 Monthly Orders per Consumer (currently 4.5)
x 12 Months per Year
------------------------------
2.9B Annual Orders
x $4 Revenue per Order (currently $3.50)
------------------------------
$11.5B Revenue
x 30% EBITDA Margin
------------------------------
2.3B EBITDA
x 30x EBITDA Multiple
------------------------------
$103.5B Enterprise Value
Assuming a roughly 25% CAGR for Active Customers, modest decline in order frequency after the pandemic, and increasing revenue per order (driven by a reduction in introductory promotions that suppress revenue) you could still justify an investment at today’s prices, but again a lot rests in the long-term margin profile which is yet to be defined by DoorDash’s management or its customers.
Thanks for reading! If you enjoyed this please consider sharing this article below, and don’t forget to subscribe to receive analysis on other public marketplace businesses. Let me know in the comments what you think about DoorDash, or or hit up @marketmkrs on twitter!