Why DoorDash Could Be a Buy

I have no position in this company, and never I have held any. This is strictly a 30K feet view of the food delivery space, and why DoorDash could potentially be a buy, not because I think it is a great company, but because there is no future for it as an independent company (status quo). DD Stock is down 43% since IPO. Not going into GMV and all those details here, but loosely applying the “Rule of 40” here (revenue growth + EBITDA margin), they’ve done OK, better than UberEats in fact. Some first year analyst might ask me why not Gross Margin. Dude this is supposed to be illustrative and as I said very high-level. Anyways, DoorDash has no “competitive moat” in the market.

Door Dash had a head-start over Uber Eats, but since food delivery service is the only service they offer, there is no cross-pollination. Customers aren’t really loyal to any particular food delivery service so long as the delivery fees are reasonable (i.e. customers have the end purchasing power here), there is a wide-selection of restaurants, and delivery times are good (Ceteris paribus). I am not going to go into the app lay out and all those things, as these are table-stakes for tech companies. If one wants to get a long-term view of where profitability could be, you have to look at Just Eats that operates broadly in the same markets (actually more than DoorDash), but despite having a head-start (started in 2001), and after so many years of existence, it is still barely breaking-even in EBITDA (and this is post creative EBITDA adjustments). All that is to say is the traditional food delivery business is a low-margin business. Restaurants really have no incentive to enter exclusive deals with any, as they’re trying to maximize their reach and limiting themselves to one platform is akin to business suicide. Just Eat has also acquired many similar type businesses over the years,  but the path to profitability is still unclear. If they offered different services (operated across different verticals), they could “entrench” their customers more. But this is not about JustEats.

UberEats launched in 2014 does more in revenue than both Just Eat (2001 launch) and Door Dash (2013 launch), meaning it has the larger market share, though this market share may vary based on GMVs, customer preference (the latter not really a meaningful metric to look at given all these platforms can be classified as near-perfect substitutes for the reasons explained above). In addition to other reasons, UberEats has done well because of the Uber ride delivery app (“cross-pollination”), and has been able to capture market share. Uber might have more new customers coming their way now that this movie on former Uber CEO (who was a dick but that's digressing) is to be released. As Donald Trump said, “any publicity is better than no publicity at all”, and this film would help generate more traffic towards Uber app, and consequently, draw more first-time customers. But keeping this movie aside, Uber is already a “household” name. As some of you, who’ve spent time in VC may attest, when companies pitch a new business model / industry to VCs, they don’t say that we desire to be the “DoorDash” or “Just Eat” of this industry, they say “Uber”. That might not be meaningful in itself but gives you a sense of the company’s brand and reach.  

If DoorDash has any chance of competing with UberEats, it needs to broaden the business model significantly i.e. expand into new services. Going into dating apps is a waste of time and resources (I will write a separate post on my experiences there), there are very few people, who’ve been successful through these apps, and most users are just looking for one-night stands. There is a reason why dating apps catering to particular ethnicities are on the rise, because users realize that the algorithms on existing platforms are flawed and biased, and nobody is really serious. These apps perhaps were good back in their early days, but now they’re inundated with all kinds of filth. Not sure why expanding into dating apps was the only thing that the DoorDash management could think of, but if they have any chance of competing with Uber, they need to either merge with Lyft (who should potentially look to acquire Via to compete with Uber), or explore being taken over by a grocery chain (Walmarts, Costco, Amazon etc.). I say Amazon because Amazon owns Whole Foods. Comparable segments broadly. With DoorDash management controlling a significant % of voting shares, this I think would also be a drag on the company’s valuation. The world doesn’t need a million (hyperbole) food-delivery apps or another useless dating app.