Sweet and sour
Jitse Groen’s reaction to DoorDash’s initial public offering may depend on whether he’s a glass half-full or half-empty kind of person. In one way, the valuation of up to $27 billion penciled in by DoorDash’s underwriters suggests the Just Eat Takeaway.com boss’s deal to purchase Grubhub in June was a steal. Yet it also reflects the cold reality of competition in the U.S. food-delivery market.
DoorDash, led by Tony Xu, saw lockdown-fueled revenue more than triple in the first nine months of this year from the same period in 2019. The upper end of the indicative IPO valuation range implies an enterprise value of around 8 times 2020 sales, assuming fourth-quarter growth at the same pace as the rest of this year and allowing for the offering’s cash proceeds. That is higher than listed European rivals Just Eat and Delivery Hero, based on estimates for their sales this year collated by Refinitiv. China’s $211 billion Meituan trades at an even higher multiple of 12 times estimated sales.
Groen agreed to hand over $7.3 billion in stock for Grubhub, around 4 times the latter’s current estimated revenue in 2020, per Refinitiv. The ongoing pandemic has turbocharged a pre-existing trend for food delivery. Groen would probably have to pay a much higher price today.
On the other side of the ledger, though, DoorDash’s aggressive, mostly cash-consuming growth has cost Groen’s target and others business. Grubhub’s slice of the U.S. market has dropped from 39% in early 2018 to 16% in October 2020, according to Edison Trends data cited in DoorDash’s prospectus. Grubhub has gone from profit to loss, just as boss Matt Maloney predicted in a letter to investors in October 2019 bemoaning excessive competition.
Xu’s challenge with DoorDash is to become dominant enough, or provoke enough consolidation, that competitive pressures ebb and prices go up enough to cover costs. Uber Technologies hasn’t yet managed that overall in its ride-share business, and it’s trying to make it happen in food delivery too. And DoorDash still reported a $149 million net loss on its $1.9 billion top line through September this year despite the Covid-19 boost.
About 85% of DoorDash’s orders come from existing customers. If restaurants, drivers, delivery companies and ultimately those firms’ investors are all to make money, home diners will have to pay more. Whether they will tolerate that remains a big question. Food delivery is not yet a tasty meal in the long term.