DoorDash surpassed Grubhub (NYSE:GRUB) as the top food delivery platform in the U.S. last year. It controlled 38% of the market in January, according to Second Measure, while Grubhub and Uber (NYSE:UBER) Eats held 31% and 20% shares, respectively.
DoorDash hit a valuation of nearly $13 billion after its last funding round, and it recently filed confidential paperwork for its long-awaited IPO. DoorDash's financials won't be fully revealed until they're made public prior to its IPO, but The Information previously predicted that it could post a net income loss of $450 million on revenue of $900 million to $1 billion in 2019.
Those massive losses could dampen investor enthusiasm for DoorDash's IPO, especially after Grubhub's stock was cut in half over the past two years. Moreover, DoorDash's transition from a private to a public company could shift its competitive dynamic with Grubhub. Let's see if this upcoming IPO will help or harm Grubhub.
DoorDash will lose its biggest advantage
As a private start-up, DoorDash didn't fret too much about profitability. Instead, it mainly focused on growing its revenue, user base, and market share to attract more funding. DoorDash's venture capital backing gave it more freedom to pursue loss-leading strategies than Grubhub and Uber, which needed to rein in their expenses to appease investors and analysts.
However, DoorDash's decision to go public suggests its funds are running low, and that its ongoing price war against Grubhub and Uber could be making it less attractive to private investors. A series of controversies involving the use of tips to subsidize wages, questionable behavior by couriers, and new laws regarding contractors are also casting clouds over DoorDash's long-term prospects.
To raise significant funds during its IPO, DoorDash needs to convince investors that its business is sustainable. But if The Information's numbers are accurate, it's losing about $1.50 for every dollar made -- which makes it a worse investment than Grubhub.
Grubhub's revenue rose 30% to $1.3 billion last year, but its non-GAAP net income declined 52% to $153.3 million. On a generally accepted accounting principles (GAAP) basis, which includes stock-based compensation and other expenses, it slipped to a net loss of $18.6 million, compared to a profit of $78.5 million in 2018.
Those numbers aren't pretty, but Grubhub remains the only profitable food delivery platform in America. If DoorDash goes public before demonstrating that it can narrow its losses, its IPO could bomb and inadvertently cast Grubhub in a more flattering light.
SoftBank could be pushing DoorDash toward an IPO
Japanese conglomerate SoftBank (OTC:SFTB.Y), which owns stakes in both DoorDash and Uber through its Vision Fund, could also be pushing DoorDash toward an IPO. SoftBank urged DoorDash to explore a merger with Uber last year, but the talks fell apart.
A successful IPO for DoorDash could offset some of SoftBank's losses from its disastrous investment in WeWork, which withdrew its IPO filing last year amid concerns about its financials and corporate governance. However, DoorDash's losses, the intense competitive environment, and a shell-shocked market indicate that it could be too early to go public.
But if DoorDash goes public, it could acquire smaller competitors with a mix of stock and cash. It could also attract investments from big restaurant chains, as Grubhub did with Yum Brands (NYSE:YUM), to shore up its defenses. It could even pursue stock-based mergers with Uber and Grubhub to conquer the U.S. delivery market.
So what does DoorDash's IPO mean for Grubhub?
It's unclear when DoorDash will go public. But when it does, Grubhub investors should check its S-1 filing to see if its losses are narrowing. If DoorDash's profitability is improving, it could generate a lot of fresh capital and spell trouble for Grubhub.
But if DoorDash's losses are still widening, it could be making a fatal mistake by going public. Without venture capital, DoorDash would need to scale back its loss-leading strategies -- which could leave it vulnerable to Grubhub's counterattacks.