Food delivery app DoorDash (DASH) hit the public market on Wednesday, and closed the day up 86% from its IPO price of $102. That means a market cap of $72 billion for a seven-year-old startup that lost $667 million in 2019, and lost $149 million in the first nine months of 2020.
David Trainer, CEO of market research firm New Constructs, calls it “the most ridiculous IPO of 2020.” Last year, his firm gave that title to the WeWork IPO, which was ultimately shelved.
Why ridiculous? Lack of profitability; huge competition; and a potential example of pandemic pull-forward in demand.
“They do not have a way to make money long-term,” Trainer said on Yahoo Finance Live just after DoorDash began trading on Wednesday. “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.”
DoorDash touted in its S-1 IPO filing that its revenue surged 226% in the first nine months of 2020 to $1.92 billion vs. the same period in 2019, thanks to a boost in demand during the pandemic.
But Trainer says revenue growth doesn’t mean much for a company that hasn’t proven it can turn revenue to profit. He also predicts the end of the pandemic will mean the end of big growth in orders for all the food delivery apps.
“Is it a coincidence,” Trainer wrote in a note last week, “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.”
The stock closed Wednesday at $189 per share.
“What $200 per share implies the company will do in the future is improve their margins to 8%, compared to negative 12% now,” Trainer says. “So they’re going to go from a negative 12% to a positive 8% margin, while also growing revenue at 40% compounded annually for over a decade. That’s super high growth and a huge improvement in margins, two things which almost never happen simultaneously.”
DoorDash CEO Tony Xu, when asked by The Information on Wednesday about his company’s eye-popping stock price at the end of its first day of trading, said, “Everyone is entitled to their opinion.”
Consolidation in food-delivery space
The food delivery space has low barriers to entry and is crowded with big names. As a result, there’s been big consolidation: GrubHub (GRUB) merged with Seamless in 2013; Uber (UBER) launched Uber Eats in 2014 and acquired Postmates this year; DoorDash itself acquired Square-owned Caviar in 2019; Instacart, more known for grocery delivery than meals, launched in 2012 and last month reportedly hired Goldman Sachs to run a $30 billion IPO.
Even if DoorDash gets big enough to buy up competitors, Trainer reasons, “How hard is it for another one to start up? If there were some advantage to scale here, then maybe you could make a case for consolidation. But in a world where another food delivery startup could start tomorrow, there are no advantages to scale… I think the history books are going to look back and make a case study out of this: a hyped market, a business that couldn’t make money in the best possible lockdown environment, not going to make money in the future, yet selling for double its original IPO price.”
Some onlookers have wondered how DoorDash manages to lose so much money even as its revenue soared amid the pandemic from stay-at-home customers. The answer is its 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.
But FOMO (fear of missing out) is a powerful market motivator, and has fueled much of the Silicon Valley IPO parade. Uber isn’t profitable, and its shares are up 80% in 2020. Snap (SNAP) isn’t profitable, and its shares are up 201% in 2020.
DoorDash has a flashing “buyer beware” line for excited investors right there in its S-1 risk factors section, phrasing that has become standard from hyped tech unicorns in the last few years: “We have a history of net losses, we anticipate increasing expenses in the future, and we may not be able to maintain or increase profitability in the future.”
Daniel Roberts is an editor-at-large at Yahoo Finance and closely covers tech. Follow him on Twitter at @readDanwrite.