DoorDash went public earlier this week and, unsurprisingly, investors couldn’t get enough of it. The third-party delivery provider initially wanted to sell its stock at $75 a share. It ended up pricing its IPO at $102. It ended its first day of trading at just under $190 per share.
It came down some on Thursday but had a market cap of just more than $59 billion, according to the financial services site Sentieo.
Suffice it to say, that is quite large by any measure. Consider the below chart:
Market capitalization, DoorDash and restaurants
Stock price is a real-time measure of investor sentiment on a certain company and is thus prone to the whims and speculations of the public markets. It’s more of a reflection on a company’s future potential, rather than on a company’s actual value.
In this instance, DoorDash investors are betting that the company will be the leader in the burgeoning market for third-party delivery.
Still, it’s incredible to see a third-party delivery company—even one with half of the U.S. market like DoorDash has—get this valuable this quickly. It is more valuable than all but two of the restaurant chains it serves. It is also more valuable than Sysco—a company that in normal years generates $60 billion in revenue for itself and $3.5 billion in annual EBITDA, or earnings before interest, taxes, depreciation and amortization.
Maybe more interestingly it is three times more valuable than the combined market caps of Domino’s Pizza John’s. If we roughly attribute a third of Yum Brands’ market cap to Pizza Hut, or just over $10 billion, it would be larger than the three largest preexisting U.S. restaurant meal delivery companies.
Technology companies have been getting obscene valuations from public equity investors for years—one day after the DoorDash IPO the home sharing company Airbnb more than doubled on its first day of trading and is now worth an obscene $100 billion. Airbnb is even less profitable than DoorDash.
In both cases, investors want in on a company they believe will disrupt existing industries and become to their business sectors what Amazon has become to retailers.
In DoorDash’s case, investors are betting that its growing share of the third-party delivery market will make it perhaps the most important company in the restaurant industry, one that changes how consumers get their takeout. In theory an all-powerful DoorDash would own takeout in all its forms, a one-stop shop for consumers who want to get restaurant food. It would dictate prices and would own a bunch of ghost kitchens, upending a model that, in all honesty, is in good need of refreshment.
That is certainly a possibility. But there are also two massive roadblocks.
First, it is dependent upon a consumer willing to pay a higher-than-normal price for food. DoorDash’s numbers look as good as they do now at least in part because there is artificial demand, driven by a consumer stuck at home and, at least for now, armed with a bit more excess cash.
Delivery costs money and it is a service that consumers should fund, for the most part. And more restaurants are doing just that—higher menu prices on delivery orders are increasingly popular. Yet these strategies also play another role, driving consumers to the chains’ own websites and mobile apps. Just this week, a dispute between Subway and its franchisees appear to be pointing squarely in the direction of operators raising delivery menu prices next year.
DoorDash has said it expects its growth to slow next year. The end of the pandemic will certainly bring that. But so, too, will the higher price for delivery. The market for 50% to 100% markups on restaurant food is only so big.
And that gets us into the other roadblock—the company’s own profitability. DoorDash is more profitable than it appears. The company has generated $95 million in adjusted EBITDA in the first nine months of the year and turned a profit in the second quarter. But again, that was off artificially high demand.
Right now, it spends a lot of money on marketing, which has helped drive its sales. It will ultimately need to maintain its sales without spending as much money on marketing to get to profitability. That is no easy task with key restaurant chains like Chipotle actively working to shift customers toward other services.
We believe third-party delivery is an important service that many customers will pay for. Is it so big as to justify a higher-than-Sysco valuation? Of that we are not so certain.