DoorDash

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

DoorDash is a local commerce platform that connects consumers, merchants, and Dashers, offering food delivery, grocery, retail, and other local services across 28 countries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

DoorDash operates a three-sided marketplace, connecting consumers, merchants, and delivery contractors (Dashers).

The primary goal is to facilitate on-demand local commerce, enabling consumers to access local goods and services with convenience and speed.

  • Marketplace: DoorDash’s core business, enabling users to order from a wide array of merchants. This segment includes the main app and website through which consumers place orders for delivery or pickup. This forms a large portion of their total revenues.
  • Platform Services: This segment primarily includes Drive (a white-label logistics platform that enables merchants to offer delivery from their own channels), Storefront (where they offer online ordering) and DashPass, which provides a subscription for reduced fees and enhanced delivery options.
  • Other: Primarily includes the company’s advertising and packaging revenues.

They have been placing emphasis on their platform services segment lately because it is faster growing and more profitable compared to their marketplace segment.

Competitive Landscape

The on-demand delivery market is intensely competitive with low barriers to entry, particularly for smaller startups.

This results in numerous competitors, with intense price competition and significant churn. DoorDash is trying to leverage its scale and data to differentiate itself from competitors like UberEats and Grubhub.

  • Major Competitors: UberEats, Grubhub, and several regional and local players.
  • Competitive Intensity: High, as new entrants are common.
  • Barriers to Entry: Relatively low for basic delivery services, but high for the complex infrastructure that DoorDash is building.

Differentiation

DoorDash differentiates through its scale, logistics efficiency, and wide network of merchants and drivers.

It has built a proprietary dispatch algorithm, which is used to reduce delivery times and improve driver utilization, making deliveries faster and cheaper.

  • Scale: Has a vast network and large consumer base.
  • Logistics: Uses AI to route orders and drivers, maximizing speed and efficiency.
  • Wide Selection: Has a broad selection of merchants, not limited to restaurants.
  • DashPass: A subscription for customers who often order, provides a form of customer lock-in.

Moat Analysis

Moat Rating: 2/5 DoorDash possesses a narrow moat primarily derived from its network effects and scale, but faces challenges to sustainability.

  • Network Effects:

The strongest argument for its moat comes from its network effects, as a greater number of consumers attracts more merchants, and a larger selection of merchants attracts more consumers, as well as more Dashers wanting to operate on the platform. It works similar to a dating app. It has a strong position in U.S. food delivery and other categories, but it is not a global company yet.

  • Scale: DoorDash benefits from its massive scale in the United States, enabling better logistics efficiency and faster delivery times.

  • Customer Switching Costs: Though switching costs aren’t as strong as, say, software or health-care, loyalty programs and embedded ordering systems create some stickiness for consumers and merchants who use their platform.

  • Sustainability Concerns:
    • High Competition: The restaurant delivery industry is highly competitive and prone to rapid change. As such, DoorDash’s profitability is regularly under threat from new business models and aggressive promotions by competitors.
    • Low Customer Loyalty: Consumers often switch between different delivery platforms depending on price and promotions. So it’s difficult to build and maintain a strong customer moat.
    • Low Switching Costs for Merchants: Switching costs aren’t particularly high for merchants. So, DoorDash needs to keep offering them value through better services, because if someone comes with better terms they can easily switch to a competitor, weakening the moat for merchant side.

Risks to the Moat and Business Resilience

  • Regulatory & Legal Challenges: They are subject to a variety of legal and regulatory risks. These include ongoing independent contractor classification matters, minimum wage laws, data privacy laws, competition laws, health-code regulations, and many more. Any one of these can negatively impact their business if they don’t comply, or new laws create hurdles for them.
  • Specifically, they are in a California lawsuit claiming that their Dashers should be classified as employees, not contractors, and if this passes it will have a serious impact on operating costs.
  • These regulatory risks can have a significant effect on their financial condition, brand and reputation.
  • Technological Disruption: The pace of innovation in on-demand delivery is high, with the potential for new technologies or business models to disrupt DoorDash’s current advantage.
  • Intense Competition: The industry is crowded with well-capitalized competitors, which are continually taking market share and putting pressure on prices.
  • Economic Downturns: The on-demand delivery industry could be sensitive to macroeconomic downturns that reduce consumer spending and business activity.
  • Dependence on Third-Party Services: They rely on third-party services such as Amazon Web Services for their platform, credit providers for payment processing, and several others. Any disruption of these providers can lead to negative consequences.
  • Data Privacy and Security: They are increasingly at risk of being hacked, data stolen, and facing more scrutiny and stricter laws. This is an ongoing process that is very difficult and costly. A security breach could be extremely damaging for the company’s reputaion, brand and finances.

Financial Analysis

DoorDash’s financials show consistent revenue growth but are marked by relatively low profitability.

  • Revenue: Has grown steadily in the last 3 years, from $4.89B to $8.63B,
  • which comes mainly from their Marketplace segment. They are heavily investing into their platform segment, as it has shown large growth as compared to marketplace segment.
  • Contribution Profit: Positive contribution profit indicates they are making money per transaction.
    • The Contribution Profit margin has remained stable over the past few years.
  • Adjusted EBITDA: Has gone from negative to positive in the past few years and is on an increasing trajectory.
  • Free Cash Flow: Still has negative free cash flow, meaning the business is not yet self-sustainable.
  • Profitability: Still unprofitable as a whole, but improving.
  • They are still using most of their gross profit for sales and marketing expenses, as well as R&D, to continue the growth, and this hurts the ability to make a net profit.
  • Margins: The net margin is negative which shows their business model is not yet profitable, and they need to bring down costs to reach a stage where they can make a sustainable profit.
  • Balance Sheet: Their balance sheet is fairly healthy with a manageable debt to equity ratio.

Understandability Rating

Understandability: 2/5 The core business model is easy to understand, but the company’s financials and complex marketplace dynamics require some time and expertise to interpret.

  • Core Business: The basic concept of connecting consumers, merchants, and delivery drivers is intuitive.
  • Financial Complexity: The various segments, accounting adjustments, and interplay of revenues/expenses can become difficult to analyze.
  • Operations: The complex dispatch algorhitm, and the overall marketplace operations with multiple stakeholders require a deeper understanding to effectively assess its future success and its potential to dominate a market.

Balance Sheet Health Rating

Balance Sheet Health: 4/5 DoorDash has a healthy balance sheet marked with sufficient liquid assets and a manageable debt level.

  • Liquid Assets: The company has a substantial amount of cash, cash equivalents, and marketable securities.
  • Debt: Their debt is manageable and is not very concerning for their current business needs.
  • Equity: They have very high equity capital, which gives them a large safety net and ability to make risky moves, as a strong base.

Key Takeaways

DoorDash is a company with consistent growth in revenue, but their financial performance and moat faces threats from increased competition, high marketing and operating expenses, a quickly changing industry, and regulatory and legal uncertainty. They have a good strategy and long-term growth plans, but management will have to execute them with efficiency and efficacy if they have any hopes of generating a substantial amount of profit, and a strong durable moat.