DoorDash is Here to Destroy Shareholder Value

Local food delivery logistics business, DoorDash (DASH), filed for its IPO at the very best time possible. DASH is a serially unprofitable business whose only profitable quarter occured thanks to an unprecedented global pandemic. It seems clear that this IPO was undertaken at a time when the company’s investors and bankers understood that they could use the window of opportunity the pandemic gave them, to make a profit off of a very bad business.

The company is looking to raise up to $2.8 billion, which would value it at $32 billion, which is twice its private valuation -$16 billion- in June this year. Even at $16 billion the business appeared overvalued. 

The success of momentum driven flywheel of network-effects businesses such as Facebook’s social network and Microsoft’s operating system has driven investors into an unshakeable belief in the ability of all such businesses to develop economies and massive barriers to entry, which would in turn make those networks more valuable. This flies in the face of research that shows that not all platform businesses have network effects and of those that do, not all enjoy winner-take-all benefits​. Many platform businesses exist in hypercompetitive markets in which earning economic profits is extremely difficult. 

DASH does not have a moat, destroys shareholder value and even in the best case, does not have a viable path to profitability, and there is scope for competitors who can offer similar services at lower costs if not for free. 

DASH and Its Peers Are Not Earning Economic Profits

Capital cycle theory tells us that high valuations are only sustainable if there are significant barriers to entry in an industry. The stratospheric market opportunity that DASH is attacking has, in accordance with everything we know about competitive behavior, attracted Uber (via Uber Eats), Postmates (which Uber Eats acquired), GrubHub and other businesses, as well as DASH. Competition is great for consumers but terrible for businesses. It drives economic profits down towards the cost of capital and in some cases, even beneath the cost of capital.

Competitors take on debt, or use venture capital money to subsidize customers in order to grow market share and it removes all pricing power from competitors, competitors who live in fear of consumers who have so many choices, just a click away. Consequently, DASH, alongside its competitors, is deeply unprofitable, as this chart from New Constructs demonstrates:

Without the global pandemic driving GAAP profitability in the quarter ending June 30 2020, DASH would have never been profitable unlike firms such as Solarium Tanning. It has not been profitable since. Losses are the norm in the business and even here, only Uber and LYFT are less profitable, and this under perfect conditions for food-delivery businesses. Competition has created an environment that is great for consumers, but where economic profits do not accrue to any of the competitors.

DASH Does Not Have a Moat

Aside from price, the speed at which DASH can deliver food is the number one factor in the business. Consequently, product/service is very low. DASH is essentially offering to do what the rest of its competitors are offering: deliver food fast and cheaply. This is a flashing warning light. If the business model depends on one simple and replicable offering, then switching costs will necessarily be low. At a certain point, fast delivery is no longer useful and may even be a negative. For example, imagine that DASH could deliver food the moment you hung up the phone. What would the point of that be? 

The chart above, taken from DASH’s S-1 filing, is superficially a triumphant chart. Many people have pointed to DASH’s success in usurping Uber, but this really should be a point of concern. This hints at how low switching costs are and the weakness of relationships with customers in this business. Low customer captivity implies that market share can change dramatically, as opposed to where customer captivity is high and market share moves minimally. 

Consumers face the ideal scenario where DASH and its rivals are a click away and prices are effectively subsidized and relationships are transactional, with each competitor pouring huge sums to win market share. For example, DashPass allows a consumer to have unlimited deliveries for a month for $9.99. 

Second Measure gives an indication of just how low switching costs are. They found that the share of DASH’s customers using other services has been rising since 3Q19:

• Postmates went from 10% to 11%.
• UberEats went from 16% to 21%
• GrubHub went from 19% to 27%

When Second Measure accounted for customer overlap, they found that the share of DASH’s customers who use DASH exclusively fell from 63% in 3Q19 to 53% in 3Q20. Quite simply, the business has no moat and anyone making family investments should look elsewhere. 

The company itself acknowledges in its S-1 filing that “within our industry, the cost to switch between offerings is low”, but does not seem to have processed the implication that this implies that they will never have a moat and consequently, will never be profitable.