DoorDash (NYSE:DASH) is now a public company, and its stock price surged to more than double the IPO price as investors piled into the food delivery app market leader. But with the company’s nosebleed valuation, long history of burning cash, and intense competition, it’s not clear whether DoorDash’s future is as assured as so many investors think right now.
On the Nov. 30 edition of “The Wrap” on Motley Fool Live, host Jason Hall and Motley Fool contributors Brian Feroldi and Asit Sharma discussed DoorDash’s prospects, as well as their concerns about the food delivery app industry in general. To put it bluntly, these three experts are not favorable on the industry as a good place for investors to profit.
Jason Hall: DoorDash, I did the Industry Focus podcast, we took a look at the S-1 a couple of weeks ago. Just set the IPO price range of $75 to $85 a share. That pegs the company’s valuation somewhere around $25 billion. I’m not going to ask specifically about DoorDash, but Brian Feroldi, you go first here. Do you buy, sell or hold, meaning maybe we just don’t know yet on food delivery apps as a winning investments?
Brian Feroldi: I’m going to go with a hold, I know that that’s a lame cop-out answer, but I’ll tell you why. A few years ago I was an investor in GrubHub. Man oh man, did that check a ton of boxes for me.
At the time, it was the market share leader, and my thought was, “Wow, market share leader. That’s got total network effects going for it.” You want to be on the platform with the most restaurants, restaurants want to be on the platform with the most buyers. When you dig into the details and the company was profitable, growing very fast, founder-led, very exciting business.
However, at the restaurant level, I’m not sure that partnering with GrubHub or DoorDash or Caviar or any of them make financial sense. In the one hand, it does because they’re getting a full-priced meal. They’re selling a full-price meal. And in theory that meal wouldn’t have been bought in person, someone at the restaurant. It makes them use their kitchen more often.
The question is, do the fees that they charge and holy cow, do they charge fees, does that justify the investment on the restaurants’ part? You’ve seen many big name companies not choose to partner with them. I’m not 100% sure that it’s a win-win-win for everybody. I think it’s a win for the consumer because they have options. I think it’s a win for DoorDash. I’m not sure if it’s a win for the restaurant.
Jason Hall: Asit Sharma, what do you say, buy, sell, or hold, on this being a good place for investors to make money?
Asit Sharma: I’m going to say sell on this one. I’ve always been pessimistic on this industry in general. I should have done this before when I was trying to find an article I wrote maybe about two years ago.
Jason Hall: Let me guess the headline. “Here’s the dumbest investment Brian Feroldi ever made,” and it was about GrubHub.
Asit Sharma: (Laughs) I would never say that because I think that Brian is able to turn dumb investments into smart lessons. My dumb investments haven’t led anywhere yet. I’m trying to do that. (Laughs)
I will say, for the same reasons, I think Brian has said what I think — that it’s hard in this industry for anyone to make money. There is that tax on the bottom line of the restaurant. It’s actually not even in the bottom line. It’s way up there in the gross profit line.
You don’t have to be a specialist in the restaurant industry to understand that these businesses operate on a very small margin. When you expend so much energy trying to figure out how to price a certain item or a slate of items, so that you can have enough to cover your fixed expenses and take home a little bit of honest money at the end of the year, something just throws that whole equation out of whack, and I’ve never seen it work out yet.
I did look at DoorDash’s IPO. I haven’t had time to listen to your Industry Focus analysis. I will just say this from a brief glance, It confirms what I already thought. The financials looked OK in one section. I think they’ve got a big boost during COVID, but the gross profit margin was below 50%. They chose to show their contribution margin, which in my world is part of your break-even analysis. When you’re showing that as 23%, and that’s a positive because it used to be negative, that’s actually, in my opinion, not helping a lot.
So I don’t know who this really works out for, except as Brian says, for the consumers. Long-term, I’m bearish on it. Maybe there’s some kind of evolution of the model. But until restaurants can stop juggling the impact of this new tax on the top half of their income statement, I don’t see why anyone would really want to do this unless you’re truly a scale restaurant, where maybe it made sense to you. But for the average mom and pop and the average mid-tier restaurant, it just doesn’t make sense, except in some really dense urban areas. So I’m going to sell on this. I have had a lot of time to think about it.
Jason Hall: I am about a 70% hard sell. In other words, I think there is a 70% chance that, even if somebody does come out ahead, the investors end up way, way behind. The podcast I did, I did with Emily Flippen, and we all know Emily’s absolutely brilliant.
There are things that we liked. There’s a lot of things that DoorDash has done an incredible job of establishing market share. You go back two or three years ago to Brian’s point, this was not the biggest, and now they are, by far, the largest. They’ve made an acquisition that’s part of that, and they have developed some really good organic growth, and their growth model is focused on not New York and not LA. So cities that are 200,000 or 300,000, where it’s further to drive to a restaurant, and there’s not as much intense competition.
But the restaurant tours that I’ve talked to, they hate these guys, every single one of them. There’s yet to be one that I’ve talked to that has said that it’s been a good experience. I have talked to one human, a family member of mine, who had a positive thing to say about DoorDash. To me, it seems like it’s just a zero-sum thing. The economics just utterly suck for everybody.
Here’s the biggest thing for me. This is the biggest thing. DoorDash, GrubHub, Uber Eats, Lyft, whatever. I don’t know if Lyft’s even doing this or not, but nobody has enough control over anything for it to make worthwhile. This is’t like Mastercard or Visa, where you have this powerful network effect that people become tied to it, and it’s sticky because your bank gives you a card that has that logo on it. The logo’s what the merchants want. They really want you, but they have to have that logo on their doors because it brings you to them. There’s no stickiness to these whatsoever. There’s not, and I don’t see a path forward to any company making outsize profits out of this without being at the expense of somebody else. So I’m very much a hard sell.
Brian Feroldi: DoorDash is coming out public at $25 billion, which is 12x revenue. In this market, I’m sure a whole bunch of people are going to be like, “Only 12 times sales?”
Jason Hall: That’s actually a really good point because this is a business that has very high operating costs. This isn’t like a lot of these softwares, or servers, or Cloud companies that when they get to a certain scale, they start kicking off massive amounts of free cash flow because every single order they get adds directly to their operating costs because they have to pay somebody to do something. So it’s not a scalable model in the same way