DoorDash Seeks Valuation Of $37 Billion In Its IPO
Food delivery company DoorDash will be going public this week. Many investors are ready to participate in this blockbuster initial public offering (IPO). On the following day, it would be Airbnb’s turn to go public. The company plans to price its initial public offering at $90 to $95 per share, which gives it a valuation of up to $37 billion on a fully diluted basis. That’s nearly triple the market value of Lyft (LYFT Stock Report) and roughly the same as Chipotle Mexican Grill (CMG Stock Report). The company will be trading on the New York Stock Exchange (NYSE) under the ticker “DASH”. Understandably, many on Wall Street have been anticipating DoorDash’s IPO.
But does it mean investors should rush in to purchase the company’s shares? To answer that, it would be helpful to first understand the company’s financials. According to its S-1 filing, the business revealed not only a stellar hike in revenues but also its first profitable quarter on track. Of course, DoorDash has been a fast-growing company even prior to the pandemic. Revenue for 2019 was $885 million, 204% higher than the year before. For the first 9 months of 2020, the company recorded a revenue of $1.92 billion, a jump of 226% from the same period last year. This came after the pandemic sparked additional demand for food deliveries. In terms of the number of orders, 2019 saw an increase of 219% year over year. Yet, the first 9 months of 2020 saw a lower order growth of 200% from the same period last year.
Now, the number of COVID-19 cases has been continuing to skyrocket over the past few weeks. I guess it’s safe to say that the demand for food delivery will stick around or even increase in the coming months. That said, would you agree that now is a good time for DoorDash to go public? If yes, would you be taking a stake in this food delivery company this week? Assuming you haven’t made up your mind, here’s what you might want to know before making the decision.
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DoorDash’s Growth In The Post Pandemic World
We all know that the pandemic was the catalyst for food delivery companies, and DoorDash is no exception. But the real question here is, what happens when the world is back to a pre-pandemic environment? I would wager that many consumers will go to their favorite restaurants in droves, don’t you agree? Therefore, many are expecting the growth in food delivery to decline in future periods. This makes it nearly impossible to gauge the growth of DoorDash over the next few years. Yet, the company is not resting on its laurels. You can see that by the company’s expansion into grocery deliveries. That’s in addition to partnerships with convenience stores including 7-Eleven and pharmacy chains including CVS.
While we may be contemplating whether to buy DASH stock, Tom White, an analyst at D.A. Davidson, has already issued a Buy recommendation on the stock. On December 1, he set a share price target of $93.The analyst wrote in a research note: “Our rating reflects [the company’s] leading market position in US online food delivery, strong recent share gains, and better-than-expected recent profitability trends.
“These positives, along with attractive adjacent opportunities in grocery/retail delivery and logistics solutions, outweigh near-term risks around likely slowing growth post a Covid vaccine and increasing regulation.”
The Food Delivery Platform Faces Stiff Competition
As you may or may not know, the company’s revenue was also boosted by its purchase of Caviar from Square (SQ Stock Report) for $410 million late last year. But many do not expect DoorDash to make another major acquisition anytime soon. Recall that Uber (UBER Stock Report) recently completed the purchase of Postmates for $2.65 billion. Chances are, the food delivery market will only have a few winners in the end. And DoorDash is the clear leader here. Together with Caviar, DoorDash controlled 50% of the market share in October, according to Edison Trends. This is followed by UberEats/Postmates (33%) and Grubhub (16%) (GRUB Stock Report).
DoorDash saw its contribution margin turning positive negative 32% in the first 9 months of 2019 to a positive 23% in the same period in 2020. Nevertheless, one should not extrapolate that trend blindly. You see, when things go back to normal, restaurants are highly likely to be selective again with their delivery providers. They could also cut down on their promotional efforts. Which will lead to lower profit margins for these food delivery companies. In addition to that, the tense competition could also cause its marketing initiatives to be more costly, and this will increase the difficulty for these companies to achieve steady profitability.
If you were to choose one among the major players in the food delivery space, DoorDash’s core business certainly looks more attractive, at least to me. But I don’t see a strong reason to jump in right at its IPO. That’s because its growth could abruptly slow down after humanity defeats the novel coronavirus. Then again, we should also consider the timing of this IPO. This is the time when the company is seeing explosive revenue growth and massive improvements in its margin. Perhaps you could say that the company’s insiders are looking to exit when the company is hot. But what will happen to the stock price when growth decelerates? Your guess is as good as mine. Now, I’m not sure about you, but if I have to choose one IPO to invest in this week, this looks like it may be a better bet.