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DoorDash: Flashy IPO Conceals Deep Problems

Even with a strong demand tailwind courtesy of the coronavirus, DoorDash still can't make a profit

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Dec 14, 2020
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DoorDash Inc. (

DASH, Financial), a food delivery app developer, made its public market debut on Dec. 9 to much fanfare. By the end of its first trading day, enthusiastic investors had driven DoorDash's stock up 86%.

While traders have given a warm welcome to the latest hot tech stock on the market, a closer look at DoorDash's financials is likely to send chills down the spines of serious value investors.

Coronavirus boosts demand

In its pre-IPO S-1 filing, DoorDash was eager to draw investors' attention to the blistering pace of its top line growth. The company saw revenue in the third quarter rise to $1.92 billion, a 226% increase from the same period last year. Much of this growth has come as a result of the widespread disruptions wrought by the coronavirus pandemic.

Yet for all that top line growth, DoorDash has thus far failed to prove that it can deliver profitability. As Daniel Roberts observed on Dec. 10, the pace of revenue growth has been matched by an equally rapid rise in costs:

"Costs and expenses rose in every category in the first nine months of 2020 vs. the same period in 2019: sales and marketing costs rose to $610 million from $445 million; research and development costs rose to $112 million from $73 million; general and administrative costs, which typically covers accounting, legal fees, and lobbying, nearly doubled to $337 million from $179 million."

Even with the powerful tailwinds created by pandemic fears and far-reaching lockdowns affecting markets worldwide, DoorDash is still deeply in the red with operating margins hovering around negative 12%.

Pandemic tailwind won't last

While the pandemic has been a boon for DoorDash's top line, the boost will almost certainly be temporary, as industry insiders have been quick to admit. Whole Foods CEO John Mackey, for example, has repeatedly thrown cold water on the notion by stating that the pandemic-driven surge in online grocery shopping and delivery will dissipate rapidly once the crisis ends.

According to David Trainer, the founder and CEO of market research firm New Constructs, this prospect likely drove DoorDash's decision to go public when it did, as he explained in a research note on Dec. 7:

"Is it a coincidence that DoorDash filed for its IPO so soon after COVID-19 vaccines were announced? We think DoorDash's current investors and bankers recognize that the window of opportunity to IPO this terrible business closes quickly when the threat of COVID-driven lockdowns no longer drives growth in food delivery demand...It took a global pandemic to drive the firm's one quarter (ended June 30, 2020) of GAAP profitability. The firm has not been profitable since, and we think it may never be."

Without the pandemic tailwind, DoorDash could face a much tougher market going forward.

A tough road ahead

DoorDash is still searching for a way to make its operating business financially self-sustaining, something that has eluded it to date. This begs the question: if DoorDash is not profitable under the overwhelmingly favorable market conditions that have prevailed for much of 2020, when will it be? New Constructs' Trainer gave his uncompromising prediction on Dec. 9:

"They do not have a way to make money long-term. There's a lot of competition. And we're seeing their market share decline. At the end of the day, this business is a race to a zero-margin business, because there's really no differentiation...This is Silicon Valley selling public markets an asset at a huge premium, and they're going to laugh all the way to the bank, and I think a lot of individual investors rushing into this are going to lose a lot of money."

Remarkably, Trainer's pre-IPO letter was even more biting in its outlook for DoorDash:

"We think this proposed public equity offering holds no value, $0, beyond bailing out private investors before unsuspecting public investors realize the business is not viable in its current form."

My verdict

Faced with ferocious competition, climbing operating costs and declining market share, DoorDash will have to do an awful lot to turn things around and justify its valuation. Consequently, it is my assessment that DoorDash is poised to struggle in a post-pandemic market environment.

There is far too much speculative enthusiasm baked into this name for my liking. My recommendation to investors is to give DoorDash a wide berth.

Disclosure: No positions.

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