DoorDash Is A Resilient Business

[I own DoorDash stocks. This is not investment advice. Do your own due diligence.]

DoorDash announced its 2022 Q2 earnings last week.  My assessment is that DoorDash’s results are mostly positive.

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Update on Grubhub/Amazon Deal:  Starting Jul 6, 2022,  Amazon Prime members in the U.S. are given a free, one-year Grubhub+ membership with unlimited free food deliveries.  This arrangement effectively brought the e-commerce behemoth back into the U.S. food delivery arena.  To me, it served as a “stress test” on incumbent players such as DoorDash and Uber Eats.  And three days later, on Jul 9, 2022, I made the public prediction that the Grubhub/Amazon deal would NOT matter (see my blog here).  

My prediction has since been proven true.  Last week, DoorDash CEO Tony Xu said on the company’s earnings call that “we haven’t seen impact.”  Uber CEO Dara Khosrowshahi said at a Bloomberg interview on Aug 2, 2022 that “we have seen zero material effect on us” (interview link).

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Reviewing DoorDash’s 2022 Q2 results, I can see that DoorDash is doing well:

Continued share gains:  For DoorDash’s investors, I believe, the most important metric is its market share.  Tony confirmed that DoorDash continues to see “share gains” in 2022 Q2.  A triangulation can be done: Uber Eats “held” its market share (source: Uber’s 2022 Q2 Prepared Remarks);  Grubhub continues to lose active users in the U.S. (source: Just Eat Takeaway’s 2022 H1 Analyst Presentation).  So, I am very confident to say, it is true that DoorDash is owning an even larger share of the U.S. food delivery market.

Resilience against uncertain macro backdrop:  Despite inflation and changing consumer spending patterns, DoorDash grew its GOV by 22% YoY and its total orders by 20% YoY (both figures exclude Wolt).  As you can probably tell from these two YoY figures, most of DoorDash’s YoY growth came from order growth, not AOV (average order value) growth.  DoorDash is growing because consumers are placing more orders on DoorDash, not because consumers are paying higher prices – a point which I will expand on later.  

Regarding user behavior in this uncertain environment, DoorDash reported no measurable changes to consumer engagement so far.  Instead, DoorDash sees stable user behaviors across income brackets.  Moreover, new consumers acquired in 2022 Q2 demonstrate similar behaviors versus those in 2021 Q2.

Operating from a position of strength:  Versus other delivery companies, DoorDash grows in a high quality manner – a sign that signals to me that DoorDash operates from a position of strength.  Here is why I say so.  Across the U.S. and Europe, many delivery players are raising prices on consumers and/or on merchants.  For delivery companies, rising prices comes with two “convenient” benefits: 1) it helps the company “look” more profitable, because higher prices drop directly to the company’s bottom line; and 2) it helps the company “accelerate” growth, as higher prices help make larger GOVs.  Consider these actions: 

• Uber Eats:  Implemented fuel surcharge, paid by consumers, beginning Mar 2022.
• Delivery Hero: Implemented minimum order value, increased delivery fee, added service fee (source: Delivery Hero’s 2022 Q1 Trading Update).
• Just Eat Takeaway:  Increased consumer fees throughout 2022 H1 and increased commission rates on restaurants (source:  Just Eat Takeaway’s 2022 H1 Analyst Presentation).

DoorDash, however, is doing exactly the opposite.  Via its DashPass program, DoorDash has been reducing “average consumer fees per order” to help “offset the impact of higher subtotals and resulted in only a slight Y/Y increase in the total consumer cost of an average order” (source: DoorDash’s 2022 Q2 Investor Letter).  To repeat:  DoorDash is cutting fees, while other players are adding fees!  Think about it.  DoorDash is charging consumers less and less, while growing its GOV faster than almost all its peers!  What a powerful combination.  

Phrasing it differently, DoorDash chooses to have the “short end of the stick” (by depressing its own AOV) yet still plays the game much better (showing a strong YoY growth).  That is how healthy and strong DoorDash’s business is.  

Seen from another perspective, delivery companies achieve network effects by increasing order density of its delivery network.  Basically, you want consumers to order more.  Rising prices on consumers may help make quarterly earnings look better, but it would not help a delivery company achieve network effects.  To a logical mind, clearly, DoorDash is doing the right thing for the long term.

Improving delivery efficiency:  DoorDash continues to see its delivery cost ($ paid to Dasher per delivery) edging downward.  At the same time, DoorDash continues to make improvements in the delivery experience, such as delivery speed and accuracy.  Reading DoorDash’s most recent investor letter and the chart titled “Total Dasher Costs Per Order,” I quietly savored the delicious fact that I built and published a very similar chart a year earlier (see that blog here).  

Bragging time:  I saw it coming a year ago!

Increasingly profitable U.S. restaurant business:  I have argued multiple times in the past that DoorDash’s core business is highly profitable.  DoorDash’s management confirmed this again this time, that DoorDash’s core U.S. restaurant business continues to see margin expansion with higher net revenue margins and higher contribution profit as a % of GOV.  DoorDash’s management also confirms that the core business continues to generate “significant cash flow” and has become a “funding source” for DoorDash’s new projects.

Strong balance sheet:  DoorDash ended the quarter with $4.5B of cash and cash-like assets and no debt.  Since its IPO in late 2020, DoorDash has not seen its net cash level drop in any meaningful way.  This fact should help comfort any skeptical mind thinking DoorDash burns cash like crazy and is on its way to self-destruction.  I repeat:  DoorDash does generate a good amount of cash and DoorDash chooses to invest its cash flow to fund new projects.

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What are the uncertainties facing DoorDash?

SoftBank risk:  Media has widely reported that SoftBank is stepping up asset sales due to SoftBank’s own financial situation.  DoorDash is a key profit contributor to SoftBank’s Vision Fund 1 and is now a ~2.5% position for that mega fund.  SoftBank owns ~33.6M shares of DoorDash stocks, and on a typical day, DoorDash’s trading volume is around 5 to 10 million shares.  If SoftBank chooses to liquidate its DoorDash position, that could depress DoorDash’s share price for a period of time.

Seasonality:  Consumers typically order deliveries less during summer time.  In 2021, DoorDash reported sequential decline of its GOV from Q2 to Q3.  Looking at DoorDash’s official guidance for the rest of 2022, it is possible that DoorDash could report sequential decline in 2022 as well, from Q2 to Q3 this summer.  Given today’s fragile market sentiment, I am not sure whether the stock market would handle negative sequential growth well. 

Growing costs:  DoorDash’s “GAAP Cost of Revenue as a % of GOV” has increased a full percentage point against its own historical average.  Given DoorDash’s take-rate is ~12%, a full percentage rise of its Cost of Revenue is equivalent to a 8.3 (=1/12) percentage point reduction on its end-state net profit margin.  DoorDash attributes half of that cost increase to 1P delivery business (e.g., DashMart) and the other half to rising insurance costs.  On 1P delivery, DoorDash has signaled its willingness to invest more.  On insurance costs, it is tricky as there is little information disclosure.  I find it hard to handicap future insurance reserves:  Do more food delivery activities induce more worker accidents, or less worker accidents?  How about the ratio of insurance claim dollars against a growing GOV base:  does the ratio come down with time or go up with time?  As of now, I do not know. 

In “investment mode”:  DoorDash’s management has made it clear that they intend to remain in an “investment mode” – i.e., to invest cash flows to fund new growth, such as new verticals and new geographies.  It logically means GAAP profits will take longer to show up, potentially looking beyond 2023.

International expansion:  In its international expansion (via Wolt), DoorDash has a lot of high mountains to climb. First, I believe, the U.S. market is the best food delivery market in the world.  Compared to the U.S., many international markets see less wealthy consumers, little or no tipping culture, and (potentially) very complicated labor regulations.  So, by going overseas, DoorDash is going to farm on a less fertile land – and naturally, we should expect less rich produce.  Second, DoorDash has a great track record winning in the U.S., but that war was fought during a time when the U.S. market was little penetrated by online food delivery – said differently, DoorDash was then fighting a war against “phone ordering,” “fax ordering” (that was how people used to order food).  That was a much easier war to fight than any of today’s wars.  Today, DoorDash is entering into markets that are already occupied by experienced incumbents, such as Uber Eats, Delivery Hero, and Just Eat Takeaway.  While DoorDash might have the best management team and the best execution capabilities, its competitors are no longer “phones” and “fax machines,” but experienced operators who have the local knowledge and who know how to survive a food delivery war.  Those operators must have studied DoorDash thoroughly and learned how to respond to DoorDash’s strategies.  My best guess is that, going forward, the chance of DoorDash winning targeted foreign markets would be lower than DoorDash’s historical experience in the U.S.  Even if DoorDash wins foreign markets, the prizes would likely be smaller than here in the U.S. 

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All in all, I remain hugely positive about DoorDash.  In the simplest terms, we eat three times a day and we all love convenience – and DoorDash is run exceptionally well.  That is why DoorDash’s stock has value. 

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