DoorDash, currently the nation's 10th largest start-up by estimated valuation, has officially released its S-1 filing in preparation for its initial public offering. The food delivery company will trade under the ticker DASH on the New York Stock Exchange after it goes public within the next few months. While the company's headline numbers looked fantastic, anyone considering owning shares should take a closer look at the company's underlying business practices.
The first thing investors likely noticed when looking at the S-1 (the SEC document any company going through an IPO needs to file) was that DoorDash has made impressive strides gaining market share -- as measured by total sales -- in the last few years. The company has gone from a 17% share of U.S. food delivery in January 2018 to a 50% share as of October of this year.
Being the market leader gives DoorDash an advantage over competitors like Uber's (NYSE:UBER) Uber Eats and Grubhub (NYSE:GRUB) by having more drivers and consumers on its platform. More consumers using DoorDash help to attract and retain drivers looking to get consistent orders, and more drivers mean that customers are more likely to get their deliveries in a timely manner.
DoorDash, along with the entire food delivery market, has gotten a nice boost from restrictions on indoor dining. Sales for the first nine months of 2020 were $1.9 billion, up around 226% from the same period in 2019. Total expenses also nearly doubled to a hair over $2 billion, leaving the company with a $149 million net loss so far this year. If expenses continue to grow at a slower pace than revenue, DoorDash will soon start generating a net profit.
A few concerns with DoorDash should give investors pause.
For the first nine months of 2020, the company had a higher amount of accrued expenses compared to the total amount of cash the business generated. Let me explain why that is a bad thing.
To comply with accounting standards, companies need to add back non-cash expenses (any expense the company still has to pay in the future) from its income statement. So even if the amount a company owes to its partners increases, it can state that it "generated cash," because the money it owes them hasn't left its bank account yet.
DoorDash added $452 million of these "accrued expenses" during the first nine months of 2020, which was higher than the $315 million in cash it brought in. Even in the best market environment imaginable, the largest and fastest-growing food delivery platform is still not in a position to return cash to shareholders.
Food delivery also seems to have trouble scaling. DoorDash has had almost $16.5 billion in gross order volume (the total amount of dollars spent on its platform) and 543 million orders on its platform in 2020, yet it's still not profitable. It's understandable that a company needs to invest in order to continue growing and scale its business, but if 50% market share and $16.5 billion in GOV spend is not "scaled-up," what is?
Finally, DoorDash has a history of treating its partners poorly. Restaurants constantly complain that the high commissions they pay food delivery apps will put them out of business.DoorDash also used to put restaurants onto its platform without asking the owners, until last May's infamous "Pizza Arbitrage" story shone a spotlight on that practice. In short, the company "signed up" a pizza joint to its platform without its knowledge or permission; copied the restaurant's menu but erroneously lowered all of its prices; and had drivers pick up pizzas that ended up being cold by the time they got to the customer, because the drivers lacked the insulated bags that would keep the pizza hot.
On the driver side, DoorDash got caught keeping the tips that its customers had intended to give to their delivery drivers. While these and other problems appear to have have been fixed (only after reporters discovered them), it indicates DoorDash has a culture of not supporting all the stakeholders in its business.
DoorDash has fantastic growth numbers. However, it has yet to reach profitability even at a GOV over $10 billion, and its executive team has a history of questionable business tactics. This should make any Foolish investors hesitate before they think about buying shares.