In this episode of Industry Focus: Consumer Goods, Emily Flippen and Motley Fool contributor Jason Hall take a deep dive into the S-1 filing of the largest food delivery platform in the U.S.: DoorDash. They talk about what drives and motivates the company and its founder, how it is diversifying and expanding to establish market dominance, and its unique strategy to counter competition. They also get into the future opportunities for the company, some areas of concern, and much more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on November 17, 2020.

Emily Flippen: Welcome to Industry Focus. It's Tuesday, November 17th, and I'm your host Emily Flippen. Today, I am joined by The Motley Fool's Jason Hall to take a dive into one of the newest S-1s on the market today, that's DoorDash. Jason, thank you so much for joining.

Jason Hall: Looking forward to it. I remember you and I did Warner; I think we did Warner Music's S-1. It feels like it's been 10 years ago, but I think it was only really seven or eight months ago. So, I'm really looking forward to this; it's going to be fun.

Flippen: Yeah, I'm happy you mentioned that, because when I had the idea to take a dive, once I saw DoorDash's S-1 for Industry Focus, I messaged you and a bunch of other Fools. I was like, who's taking a look at this S-1, who wants to jump in? I was like, I know Asit is a frequent guest, and you're like, hey, I am too, you know, did you forget about Warner Music? And when you mentioned, man, it feels like we are living in a different world. We talked about that, gosh! January, February, and it could be an eternity ago ...

Hall: I think so, it really, it's hard to tell. [laughs] It really, really is. Really is.

Flippen: Well, I'm really excited to talk about DoorDash. The plan, for once it goes public, is to have the ticker DASH; easy enough to remember. But I'm not just excited to talk about DoorDash because it's a really interesting time for a food delivery company to be going public, but also because they're actually going public via an IPO, which is different than what we've seen a lot of other companies do with direct listings, with SPACs [Special-Purpose Acquisition Company].

Hall: Wait a minute, Emily. Do we still do IPOs now? I thought those... I thought we only did SPACs now.

Flippen: [laughs] I thought that I had messed that up. I was like, oh, my gosh! My research, I went into the wrong company. [laughs] And it's really strange.

Hall: [laughs] It is, it's crazy. And that's the funny thing, if you look at the data, IPOs are still dominant, right, but SPACs control the narrative now, that's the thing that's interesting. But these S-1s, and it's interesting, because you just get more information with the S-1 when a company IPOs, you get a lot more data than you do with the regulatory filings for a SPAC.

Flippen: Yeah, as a financial analyst, as much as I understand, I won't go as far as a revolutionary, but landscape-changing, SPACs and direct listings are, I selfishly love it when a company chooses to go for a traditional IPO, because the S-1 contains so much interesting and exciting information. Getting my hands on a new S-1 is kind of like, you know, being a kid at Christmas and walking out and seeing presents under the tree. So, I'm excited, because we have so much information about DoorDash. And one of the other reasons why I'm so interested to talk about it is because when I -- before I read the S-1, I had some very strong preconceived notions about this company, thinking this was, for lack of a better word, is probably going to be a "dumpster fire," and then as I read through the document, I was actually pleasantly surprised. And I know S-1s are written to make you excited as an investor, but I learned a lot about the company. There's more than meets the eye, so I'm really excited to break it down with you.

Hall: Yeah, me too. And I certainly have, I think a lot of people have, it seems like there's a little bit of a binary perception about these food delivery companies. Either you just kind of like them and they're fine, and that's as much as you think about it, or you despise the entire business model because you think they're stripping all the profits away from local restaurants. And the truth is maybe somewhere in the middle, but we'll talk a little bit about that.

Flippen: Yeah, let's actually start there, we could talk a little bit about the business basics. And it's a good place to start, because if you're actually going through the S-1, if anybody who is listening has the opportunity to read it, who has already read it, one of the first things you'll see is the company's mission statement, scrolling down the S-1 they're filing. And what I thought was really interesting is that their mission statement is "to grow and empower local economies," they spent so much, not just with their mission statement, but throughout the entire S-1, talking about how the goal is, as a company, through their Founder story, to empower local businesses, to support local businesses, local entrepreneurs. And I was shocked, I was shocked it was the first thing I read, because it goes against the narrative that as a consumer I've been told from restaurants and consumers that, yeah, these delivery services are squeezing out restaurants, they are pinching pennies and making it really hard for local shops to exist, right, they're kind of a pigeonholing them into their service platforms. So, I thought that was really interesting. But with that being said, obviously their mission statement differs dramatically from the way the company is being perceived in the public markets today.

What can you tell us just a bit about the business as it exists right now?

Hall: So, from what they've told us, they have around 18 million customers, and they define a customer as you or me that orders food, and they do business with around 390,000 merchants and 1 million delivery people, which they call Dashers; which, you know, we're getting into the holidays ...

Flippen: ... I know, that's what my mind went to.

Hall: Let's roll with it, right? And these are independent contractors who work with them. It's part of the gig economy, this is that sort of thing. They say they've had over 900 million orders placed on the platform; I'm sure it's probably a good bit more than that by now. They operate in the U.S., Canada, and Australia, and they have two brands. They have DoorDash and they also operate Caviar, which they bought from Square about a year ago; they paid around $400 million for it. Of course, their merchants are mainly restaurants, but they're expanding into grocery delivery, flowers and other things, but restaurants are still, that's the core, that's where they're trying to establish market dominance. Because this is about market share, it's the whole network effect, sort of, idea of what they're trying to do.

Flippen: And what I thought was also really interesting, when you talk about market share, DoorDash is technically the largest food delivery platform in terms of market share when looking at total sales, so ...

Hall: ... I was surprised to see that as well, I really was.

Flippen: I was too. Honestly, my mind would have gone to GrubHub or UberEats, which are formidable competitors, but DoorDash has a really unique strategy -- we'll get to it a little bit later -- but that has allowed them to gain a substantial market share. Now, it is still a fragmented industry in the sense that the switching cost between the customers, you or I, is really low. I go on DoorDash, but then I also price [laughs] compared to, like, five other different apps before I order. It's so funny, I'm frugal enough to price compare, but not frugal enough to go pick up my own food. [laughs] But apparently there is a lot of mess out there in the world.

Hall: Oh, yeah. Well, I think that fragmentation is important too, because what seems like what has to be the dominant one, might just be the biggest one where you live.

Flippen: Exactly. It competes not only on a national level, but on a local level too, there's lots of local food delivery apps. And you can almost argue that since they understand the core market and the locality in which they're operating, they're almost better prepared to serve that market. I'm not sure if I buy into it, but it is to say that competition here is really formidable. But that's not without good reason, when you talk about the market opportunity, it's a huge market opportunity for food delivery.

One of the things that they broke out in their S-1 was just how much money was spent by Americans in restaurants last year; it was over $600 billion. And of course, your mind goes to, well, of course, you know, somebody is going out to have a nice steak dinner, that's not something that they would get delivered. But what I was shocked by, one of the things that they mentioned in their S-1, was that 50% of that $600 billion opportunity was actually food that was consumed off-premise. And that was in 2019, that was before COVID.

So, I think they're competing for a sizable market. A market that maybe the Wall Street analyst expects will disappear next year as a vaccine becomes available and people stop ordering as much. I won't deny that people will stop ordering as much as they do today next year, but I still think that this is a growing industry, and that long-term there has to be some future for food delivery. I'm not convinced that DoorDash is completely priced out of the market here, I'm not sure, it almost feels like a market opportunity worth fighting over, for me.

Hall: I think so too. And one of the things that we've talked about before is, the advent of the ghost kitchen, right? You think that there are more restaurateurs looking at the opportunity for off-premises food, right, that's a big thing. So, I think there's going to be more potential to your point, I think that, sure, when we go back to normal, things are going to change, but again, thinking about the longtail opportunity, I think you're probably right.

Flippen: And let's talk about how they make money then, because we conceptually, as consumers, have a sense about the prices we pay when ordering food over an app like DoorDash, but the business is much more, or I wouldn't say "much more," the business is "more" than just charging that flat fee. So, how does DoorDash make revenue?

Hall: So, if you look at the way they break it down, they actually give some good illustrations to kind of help show the way that it works. So, mainly from three services. No. 1, they charge a percentage fee from merchants, so mainly restaurants. So, you order from the restaurant, and let's say it's a $30 order, so you've got taxes and a tip you put in there, but then you have the actual price of the food that you pay the restaurant, let's say $25 of that is the price of the food that the restaurant charges, that's the cost for DoorDash. They'll take a percentage of that. They also make money from some merchant services that they offer, and that's something, Emily, I want to hear a little more from you on later; I think it's really interesting. They also have a free delivery membership program, which they charge $10/month for, that brings in revenue, I think as much as anything, that's something they're trying to use to capture an audience. But the big thing is they make money from those fees that they take a percentage from, from merchants.

Flippen: Yeah. So, I think the majority of the revenue, obviously, is still attached to that take rate from merchants. Historically, that take rate has been, kind of, a mind-boggling [laughs] high rate of around 15% for merchants. But that did fall to 13% for the 2018 cohort. We don't have any more updated numbers after 2018, so it will be interesting to see how that number has trended since then, and especially over the last year. They didn't break that out, so I'm not positive, but just to give you a ballpark about how large of a fee they're charging merchants, it's pretty substantial. And you can start to understand the arguments that merchants maybe aren't the biggest fans of companies like DoorDash when you figure out just how much revenue it's taking out of their pocket.

But I'm happy that you mentioned the services division. This was probably the thing I was most surprised to see when reading through their S-1. It's not a large part of revenue right now, but DoorDash is expanding into services for merchants. It's almost a Shopify-esque experience, where they're trying to integrate themselves closer into what the local mom-and-pop restaurant is experiencing. Right now, they offer something called DoorDash Drive, that allows merchants to sell directly to customers on their own websites and their own channels then fulfill that order with DoorDash's platform. And they also offer DoorDash Work, [DoorDash for Work] (sic) which allows merchants to essentially serve the catering industry as well as events and businesses better.

So, interesting services here, I'm not sure how sticky they are with customers right now, because one thing that you'll see with the merchants that use DoorDash, they don't exclusively use DoorDash. I can't think of any merchant that I've been to that didn't also accept orders on, say, UberEats or GrubHub or whatever local delivery app. Even places that are local might have their own delivery services. So, DoorDash is just one part of the function for merchants right now, but to the extent that they can leverage their future services to create a deeper relationship with those local merchants, then maybe that says something about the stickiness of that relationship, maybe that grows into something that's more exclusive in the future. I'm not sure, but I saw it, and I was excited by it.

Hall: I think the key thing for me, when I think about it is, when I first heard about them, I'm like, oh, great, this is, they're trying to do things to make it easier for merchants that are less tech-savvy, but I think it's actually the opposite, right, where they're trying to find the restaurants that already have some sort of a digital strategy that they've probably already implemented, and allows them to view DoorDash as a partner, not a competitor. So, I think it's really smart that they're doing that, and I think it's going to be more necessary over time. The key piece for me, what I always come back to, is that take rate, there's a cost for doing delivery. If a restaurant does it in-house, they have to have staff, they have to have some sort of liability insurance. There's a real hard cost for that sort of thing.

I think the biggest thing is the perception. You have a local restaurant that didn't do delivery at all before COVID, and now they have to and they're getting stunned with these big numbers that they don't have any kind of context for. So, I think that's part of it, right. But let's keep going.

Flippen: Yeah, definitely. I want to talk about the strategy. I will say, I'm aware for our listeners that I'm burying the lead here [laughs] a little bit with their finances. I'm sure everybody who tuned in, immediately expected us to talk about the fact that this is an unprofitable business, I'm saving that. I liked the S-1 more than I thought that I did ...

Hall: Are you telling me not to point out that they burn cash? I won't mention it, I promise I won't, if you don't ... [laughs]

Flippen: We'll talk about it, but you know, I'm giving that nice hard sell right now to our listeners, bring them in on the great things about this business while also burying the very real financial picture, which is not great for this business right now. I promise you we will get to it, but first I wanted to point out their strategy. I think the strategy that they have, and the way that they handle competition, in particular, is really unique.

Okay, there's one part of the strategy that's not unique, let's start there, this is what they call the flywheel effect. I don't think I'd go as far as to say it's a flywheel effect, really what they're saying is that there's network effects with the way that DoorDash does business. But maybe, Jason, you can talk to us through what this network effect, or this flywheel effect as they describe it; like, how that operates in their ecosystem.

Hall: Yeah, I think they call it a flywheel effect, I think it's really more of a network effect. But the idea is that they want to acquire as many customers as they can. And they make an investment to acquire customers through marketing or the acquisition they made last year of Caviar. They spend to acquire customers in those, sort of, ways, merchants are going to want to get on their platform. So, think about it like MasterCard, for example. MasterCard, if you're a merchant, [laughs] you have to take MasterCard because everybody has a MasterCard in their wallet. If you are a bank, you want to offer MasterCard, because you want all of your customers to come to you, so they can have access to those merchants. If you're a consumer, you want to carry a MasterCard, because you want access to all of those merchants. So, it's kind of the same idea there, where they want to add more customers, because more customers means more merchants are going to want to use DoorDash, and want to partner with them, so they have access to more customers. So, that's kind of the way it works. I guess they're almost kind of like maybe the bank in this model, if you think about those three different partners. I think the key is whether or not it's going to prove to be sticky, right?

So, the key is that they have to offer more than just access to customers, because as Emily was talking about earlier, there's little reason for customers to be sticky if you have multiple really good, high-quality food delivery services in your area, you can flip from one app to the other, and it takes an extra minute to make sure you're getting the best deal. That's the key.

One of the things that they're really trying to do is expand things like the merchant services, working on having better logistics, so they can create some sort of differentiator that's not just, we have, you know, 50,000 people in your town that downloaded our app. There has to be more than just that.

Flippen: Yeah, and it's worth noting, I said this was part of their strategy that's not unique. I think every food delivery service right now believes that they can get some sort of network effect by increasing scale, making their product and their platform, I should say, just that much stickier with the end user. Ultimately, I think, the struggle that this industry has is the easy switching cost of you or I, but things like DashPass, that's their monthly subscription fee, where you pay and you have no delivery fees, somebody who subscribes to that isn't easily going to switch over to, say, an UberEats and pay a delivery fee when they get free delivery on the DoorDash platform. So, expanding their relationship with customers I think is one way to do that.

I'm not completely sold that this is an industry worth writing off, I did four years of my undergrad in China, so I tend to look at the Chinese market as potentially an indicator of what the market in the U.S. could look like. And it's not apples-to-apples, but we've seen successful food delivery companies in China, Meituan-Dianping comes to mind, is a company that while doing a medley of other businesses, as a lot of investors may already know, has made food deliveries somewhat successful there. So, I think that this isn't an industry worth writing off completely.

And before we move on to talk about management here, I kind of want to mention another strategy, really, this is more of a strategy for how they compete with their competitors in certain markets, but I think it's really unique. They're targeting suburban and smaller metropolitan markets. This blew my mind, because they specifically called out DC, where I am, they called out New York, they called out LA, as cities where they're like, hey, we don't really want that market share. And it sounded counterintuitive to me, but as they talked about it in the S-1, it started to make sense, because they see that, A. it's much easier [laughs] to drive, park, and pick up in suburban metropolitan areas. It provides a level of consistency to the Dashers that they know they can park in front of somebody's house if they need to, to deliver that food, to drop it off, that they don't have to worry about necessarily getting into at 40-floor apartment building to give somebody their delivery order and pay for parking.

These are things that provide ease of logistics. And then additionally, the people who are ordering delivery in these areas tend to be families and they have a much higher value per order, they order a lot more food than just one person, you know, like myself living in a one-bedroom apartment. So, I think that's a really interesting strategy. It's not turning into [laughs] high margins for them right now, but it could in the future.

Hall: I think it could pay off as a first-mover strategy, because the bottom-line is that there's less competition in those areas. And if they can establish some brand presence -- you know, I'll use where I live as an example. We're about an hour from Los Angeles, give or take, sometimes it's four hours; [laughs] it depends on traffic that day. But it's a very affluent area. There's a lot of people that live here that work in the greater metro area, but we don't have public transit, it's not easy, and we don't have a restaurant. It's not like DC where a lot of the -- especially, if you're in DC, or if you're in, like, a route where Fool Headquarters is, like, you have at Del Ray and Old Town Alexandria, where you could walk from your apartment and walk two minutes and pick up food and walk back, right? So, the idea of delivery might not even be that compelling, because it's going to take half-an-hour longer. But where I live, you got to get in the car, you're going to drive, and you get there. And so, the idea of delivery is certainly very, very compelling here. I think it's an interesting strategy, and if being the first-mover pays off, again, how well they treat the merchants, I think is going to be a big part of how successful it is.

Flippen: Exactly. On that same note, I'm kind of interested to hear your take about management, especially as it applies to how they treat the merchant. I'm not sure about you, but when I read Tony Xu's, who's the Co-Founder and CEO, when I read his letter that he was included as part of the S-1, I was kind of emotional he invested in his performance. Again, the letter and stuff like that, it's intended to make you emotionally invested, so take it with a grain of salt. But were you impressed by Xu or did you, kind of, feel like the letter included in the S-1 was pandering?

Hall: It's hard to tell, right, because it's easy to -- to be honest, probably a little bit of both, but that doesn't mean that it's not legit, that doesn't mean that it's not true heartfelt... There's no true meaning there. But here's the short version for folks is, Tony Xu, his family immigrated to the U.S. He is first generation American, and talks about growing up with his family working in a restaurant. And he said he wanted to empower people like his family, his mom, and fight for the underdog. Because I think anybody that knows anything about the restaurant business knows that it is cutthroat, margins are very, very thin and most restaurants don't survive the first few years, right, before they don't make it. It's a tough, tough industry.

So, I mean, I'm sure there's probably some truth there but [laughs] we are a cynical people, so we still have to take it with a grain of salt, of course. You know, in God we trust, all others pay cash.

Flippen: Exactly. And what is worth pointing out, as we talked about how the delivery services like DoorDash, even with emotional letters like this, can still marginalize the underdog; in this case, which is the local merchants. It's worth repeating that when this COVID crisis happened, this pandemic happened, a lot of local businesses weren't well-suited to start doing pickup or delivery. And DoorDash, among a host of other services, were there to support their businesses, to help them meet the customer at their new location. So, they provide an essential service, especially right now.

I don't want to understate just how relevant the services DoorDash and others provide is, but it is still worth noting that this is not a business where you have "rave customers." Very rarely will you have merchants speaking really highly of the middleman; which is in this case DoorDash. So, it was really interesting for me to read that letter from Tony Xu talking about working for a local restaurant, or his mom/family working for this local restaurant, him been growing up in that environment, because it's not the background I would have immediately jumped to with my preconceived notion about DoorDash.

But without any further ado -- and again, I promise we'll get to the financials just right after this, right after this -- let's talk about competition. We mentioned UberEats, Postmates, and GrubHub; how does DoorDash stack up in terms of market share here?

Hall: I was stunned; I did not expect this. I knew that they had grown pretty substantially, but I did not expect this. U.S., how about 50% of the market? [laughs] That's mind-numbing. Here's the thing, you go back two years ago, well, almost two years ago, almost three years ago now, beginning of 2018, 17% of the market; of course, they acquired Caviar which added some business. But let's talk about how competitors have changed, so UberEats has 26% market share. UberEats had 27% back then. GrubHub had 39%, has 16% now. And then, Postmates 11%; 7%. And this is an interesting one, other -- so, you think about all the other companies out there that had 6%, and now it's like 1%. So, there's been a lot of consolidation, and there's no getting around it, DoorDash has delivered everybody's lunch and then eaten it.

Flippen: [laughs] I love that. And what's worth mentioning is that, if you're somebody who is a Dasher for DoorDash, you're otherwise employed doing things, or maybe it's a part-time job for you, not necessarily full-time, if you're delivering, you want to be delivering for the platform that has 50% market share in terms of total sales for the industry. I think it would be hard to imagine somebody who says, oh, I'm only going to deliver for Postmates, and they have 7% of total sales across the United States now, depends on your locality, but it could be challenging if you're going to invest your time and effort into being a Dasher or a delivery person for these services, to not be with DoorDash in some form or fashion.

Hall: No doubt about it. I think, in a big way, the network effect maybe helps them on that end as much as it does on the acquiring customers, because the only way [laughs] this works is if you have fast, reliable delivery. So, that's really, really important. There are some risks there too, I think, are worth acknowledging.

Here in California, last year we had AB 5 that was passed into law, which was the law that was targeted at Uber and Lyft about all their drivers being contractors, freelancers versus being employees. And there were all of these unintended consequences where all of these other industries were affected and forced companies to either hire people and classify them as employees or just stop doing business in that area. And there's a lot of states that are considering legislation of varying levels to force companies in the gig economy to employ people. And I get it, as someone that's personally experienced this with my work through The Fool as a contractor, you want people to have access to benefits, affordable healthcare, unemployment insurance, disability, all of those things that sadly sometimes we just need. Whether forcing companies to make people employees [laughs] to have access to that or some other type of reform, I don't think we need to get into that, but it does create a risk for DoorDash, as in all of these platforms, as they expand into various different localities.

Flippen: And if you're niche S-1 reader who likes to read little footnotes in details, you'll actually see that form in numerous lawsuits against the company, a lot of them from Dashers in certain localities claiming exactly what you just mentioned, which is that Dashers should be considered full-time employees. We saw that legislation not necessarily shaking out in California during the most recent election cycle, but that doesn't mean that at some point in the future, even in some localities, that DoorDash won't be fighting this legal battle. Clearly having these Dashers, many of whom work part-time, classified as employees would make it much more challenging for them to be a profitable business. And as we've, you know, quietly [laughs] alluded to throughout the entire show, this is not a business that would be solvent if they had to pay their Dashers as full-time employees.

So, I put it off as long as I can, Jason, without any further ado, let's talk about their finances.

Hall: Whoa buddy! Whoa buddy! One could say, it's a bloody mess. It is a lot red, a lot of red. But that's typical for start-ups, it's not atypical at all. So, 2018, $290 million in revenue, $210 million operating loss; that's pretty big. But they said, hold my beer, in 2019, $885 million in revenue, $616 million operating loss. So, oh, hey, they made $23 million in net income in their most recent quarter, but things have been a little bit busy, and that's not going to continue. They've said that they anticipate continuing to lose money.

Flippen: Exactly. And it's clear that this company choosing to go public today is a strategic decision on the part of management here, they know that this is probably one of the only times [laughs] in the foreseeable future that DoorDash will be able to say they had a profitable quarter. It does mean that once they get a large amount of scale, they can make money, but the reality is that they're tapping the equity markets when things are still looking pretty decent for them, with the understanding that when 2021 comes their year-over-year comparable numbers are going to look much, much more challenging.

That being said, all the numbers that we've quoted, minus that $23 million in net income for the prior quarter, were pre-pandemic numbers; the market share, the revenue. This is still a business that is doing business, it's not one that immediately goes insolvent when COVID goes away, if and when COVID goes away, but it is one that needs shareholder money to continue operating for the foreseeable future. This IPO is a strategic timing on the part of management, and their financial performance is representative of that.

Oh, but, you know, and that being said, we could talk about how they make no money, they lose cash, the margins are improving but horrendous. Some of the numbers are ticking upwards, though, both because of COVID, but even before COVID, this is a business that seems like it could, at some point, get scale.

Hall: No, I think that's the key. I don't think they're at a point where they could cut off all their growth spending and consistently be profitable, they need to continue to spend to build scale to get to that point. But the goal with this sort of a business is to, within a number of years, take this investor capital that they get -- I don't think they've announced when their IPO date yet is, have they?

Flippen: I don't believe so, no.

Hall: Yeah, I haven't seen anything. So, let's assume that they IPO before the end of the year. The idea is to raise a ton of capital, then they can use that capital to continue to make these investments over the next number of years to get to that point where they have scale. And then they can start either cutting back on the actual dollars they're spending, or simply they've gotten so big that the revenues that the operating cash flows are bringing in are actually getting to that positive point. So, that's the idea. It's going to take time, and investment in this company is a tacit understanding of that reality.

Flippen: Exactly. And one of things I do like that they do during their S-1, it's something that companies like Chewy, when they went public also did. I like seeing it broken out like this, is they break down their customer acquisition spending into cohorts. And they track cohorts from different years and see what their spending is like to get a sense about if they're efficiently using their marketing dollar. And while it is [laughs] nowhere near as impressive as Chewy's was, Chewy was truly outstanding, this is not a company that is doing Chewy-level margins on their different cohorts.

It is tracking spending, and we see spending year-over-year from each of their different cohorts increasing. So, they tracked cohorts from those people that they acquired in 2016, 2017, and 2018. And in year four, the average 2016 cohort member is spending over 1.5X the amounts on the platform in comparison to what they're spending in year one. The 2017 cohort in year three is 1.62X. And then the 2018 cohort in year two, so just one year after they acquired, are already spending 1.65X what they spent in year one on their platform. So, they're deepening relationships with consumers and customers that they acquire, but at the same time, they're still [laughs] losing money on each order. So, it's great that they're deepening that relationship, but this isn't ...

Hall: They have to ...

Flippen: They have to, exactly. They need those numbers to be much higher than 1.65X, right. They need to be higher than 1.5X, they need those numbers to take up to 2X, 2.5X, that would be how this business ends up being profitable over the long term. And I just don't know about you, I can't imagine [laughs] myself spending 2.5X or 3X the amount on DoorDash next year as I did this year.

Hall: No, I think that's the key, right? But again, looking beyond that, I think this is the reality is, how much bigger can the market get. And they have a strategy to try to go where there isn't as much competition, like we talked about. But fast-forwarding out three years, four years, yeah, I can see my spending going -- OK, well, I have a three-year-old and it's getting more expensive to feed him, so that's why, [laughs] that's why my adjusted for the inflation of my child number will probably go up.

Flippen: I love that. adjusted for the inflation of my child numbers. [laughs] Your S-1 would be very interesting to read, Jason.

Hall: Yeah, that's true, that's true.

Flippen: Well, I want to close up here. We've gone a little bit long, that's my fault, I was very excited to tape this episode today, because it was such an interesting read for the S-1. But I want to talk about red flags and risks, and then ultimately ask us both the question about if we are interested in investing in this company.

For me, I actually saw a deal-breaker for DoorDash in their S-1. So, as much as I talk about things that I liked previously, there's one thing that I don't compromise on and it's something that I've learned through my experience investing in industries, like, cannabis, investing in Chinese companies and very risky industries, and that's internal control.

Hall: Internal controls, yep.

Flippen: Yep. Oh! It's the two words that no investor wants to hear. But this is a company that had material weaknesses in their internal controls, which essentially means that they don't have the skills necessary to identify issues related to accounting practices, meaning that a lot of the numbers they've reported aren't necessarily trustworthy, and that their auditors even were going on good faith when the company reports these numbers. The auditors pointed out that they had material weaknesses related to, both, a lack of skilled staff, [laughs] which is concerning for a company as old as DoorDash is, but also, inadequate processes for revenue to cash reconciliation. Those are just two things, as interested as I am in this company, A. I probably wasn't buying before this, but reading that, I'm out.

Hall: Yeah, I tend to agree. That should be a deal-killer, right, because as much as you can be optimistic about the future of this industry, the necessary role that it seems like it's going to play for small restaurants to -- most small restaurants just can't afford to bring somebody on the payroll to do delivery, they just don't do enough delivery business to justify that. It seems like that there's a need, and eventually there's going to be equilibrium where the restaurants can make money, the delivery services can make money, but it's just to -- I mean, if DoorDash is saying, well, we don't really know what's going on, that's no bueno for me.

But I think right now, for me, because the industry is so competitive, it's still so young, I don't want to say it's zero-sum, but to a certain extent, this is a zero-sum industry, where they're extracting a certain amount of value out of food delivery, out of food access to restaurants, that I don't know how much incremental costs can be added on top of it, because there is so much competition. So, I'm just not convinced how much of that would be able to flow to shareholders yet. I'm sure as hell going to watch, because it is a growing industry, right, but I'm just not ready yet.

Flippen: I agree. And as you were talking there, I thought about relating back to a conversation I've had with Asit numerous times on Industry Focus, going back to my dating analogy, I thought about a great analogy for material weaknesses and internal controls. [laughs] So, bear with me, Jason.

Hall: [laughs] I await with bated breath; this is fun.

Flippen: [laughs] So, it's like this, it's like you're going out on a first date with somebody, you sit down at dinner and you ask about their life, and they're telling you things about themselves. And for the most part it's interesting, you're like, maybe I'll give you a second date. And at the end of the conversation they add the words, I think all of what I told you is true. And you're like, what do you mean, do you think you have a job, do you think this was your background, you think you're not homeless, whatever it may be, they add this big asterisk, that's like, we think all of this is true.

Hall: They just put everything that you've experienced completely into question.

Flippen: [laughs] Exactly. So, everything we talked about in the S-1. And while the material weaknesses, the lack of skilled staff, isn't likely to impact every single aspect we talked about, it can add that asterisk to the entire report saying, we think all of this is true. And it's great, I want you to believe in yourself, but [laughs] I also want your auditors to believe in you too, and until that's happening, I'm sitting on the sidelines.

Hall: I love it. I have this mental image, like, I'm watching a movie and I see Emily sitting down, and this handsome man sits down and they have this lovely conversation. And then at some point something happens and Emily just, check please. Roll, cut to credits, right? It's done, it's just over, it's done, and that's DoorDash, right, it's just done.

Flippen: [laughs] It's just done. So, I take it that you're not interested today?

Hall: No, no, like I said, I want to follow the space, because I think it's going to serve an important role. We all use these sorts of things, so it's important. I just think it needs to mature, the businesses need to grow up enough so we can know what they're actually going to be, and there's just too much risk without enough real clear line-of-sight to some sort of profits.

Flippen: I agree. Well, Jason, thank you so much for coming on and indulging my, apparently, rather strong opinions about DoorDash, I appreciate it. [laughs]

Hall: This was fun; I enjoyed it. It's always good to come on with you, Emily; we'll have to do it again sometime soon.

Flippen: Definitely. And listeners, that does it for this episode of Industry Focus. If you have any questions, you can always reach out at IndustryFocus@Fool.com or tweet at us @MFIndustryFocus.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear.

Thanks to Tim Sparks for his work behind the screen today. For Jason Hall, I'm Emily Flippen, thanks for listening and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.