DoorDash, the largest food delivery player in the U.S., will price its IPO on Tuesday, Dec. 8, and start trading on the New York Stock Exchange the following day. It plans to raise up to $2.8 billion by selling 33 million shares, which would give it an initial valuation of up to $32 billion -- roughly double its private valuation of $16 billion in June, and about five times higher than Grubhub's (NYSE:GRUB) current enterprise value of about $6.5 billion.
DoorDash's revenue rose 204% year over year to $885 million in 2019, and surged another 226% to $1.92 billion in the first nine months of 2020 as the pandemic boosted demand for online deliveries. Its total number of orders rose 219% year over year in 2019 and grew another 200% in the first nine months of 2020.
DoorDash is clearly growing faster than Grubhub, which only grew its revenue 36% year over year in the first nine months of the year. But Grubhub will soon be acquired by Just Eat Takeaway (NASDAQ:GRUB), and the combined company will be much larger than DoorDash.
DoorDash isn't profitable yet. Its net loss widened from $207 million in 2018 to $667 million in 2019, but narrowed year over year from $534 million to $149 million in the first nine months of 2020.
DoorDash's financials look better than those of some other recent tech IPOs, and the stock could also be significantly cheaper at 10-15 times this year's sales. But before investors chase this incoming IPO, they should review three of its biggest risk factors.
1. DoorDash is in the same boat as Uber and Lyft
DoorDash doesn't classify its Dashers as employees. Instead, they're independent contractors who cover their own expenses and aren't eligible for any benefits or worker's compensation.
A growing number of states, including California and New York, are scrutinizing that business model and pushing companies like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) to reclassify their contractors as employees. Any new regulations would also affect DoorDash, which has repeatedly faced complaints, protests, and demands for higher wages.
Last year, DoorDash was also pilloried for subsidizing its Dashers' set delivery fees with customers' tips. It subsequently abandoned that controversial practice, but warns that its new pay model may "result in an increase to the fees we charge to consumers, which in turn could affect our ability to attract and retain consumers."
DoorDash also warns that its current pay model could generate less consistent earnings for Dashers, and may lead to "negative publicity, lawsuits, and government inquiries." In other words, the more DoorDash tries to narrow its losses, the less likely it is that it will raise its fees for its Dashers -- which could spark more protests and tighter regulations.
2. DoorDash's growth will decelerate
DoorDash's growth accelerated significantly throughout the pandemic, but it expects its growth "to decline in future periods." This makes it tough to gauge exactly how fast DoorDash will grow over the next few years.
DoorDash's revenue was also boosted by its purchase of Caviar from Square (NYSE:SQ) for $410 million in late 2019. But DoorDash probably won't make any more major acquisitions in the near future, since Uber recently bought the last minor player, Postmates, for $2.65 billion.
3. Competitors are at DoorDash's gates
That market consolidation leaves just three major food delivery platforms in the U.S.: DoorDash/Caviar, which controlled 50% of the market in October, according to Edison Trends, followed by Uber Eats/Postmates (33%) and the former leader Grubhub (16%).
DoorDash's contribution margin expanded year over year from negative 32% to positive 23% in the first nine months of 2020. However, investors shouldn't assume that figure will keep rising, for two reasons.
First, restaurants will likely become more selective again with their delivery platforms and less aggressive with promotions after the pandemic ends -- which could restart the pricing war between the three market leaders and erode their margins again. Just Eat could also intentionally operate Grubhub at a loss to grow its market share in the U.S., then offset those losses with the growth of its European platforms.
Second, DoorDash warns that competition could cause its marketing initiatives to "become increasingly expensive," and "generating a meaningful return on these initiatives may be difficult."
Should you buy DoorDash's IPO?
DoorDash's core business certainly looks healthier than those of other gig players like Grubhub, Uber, and Lyft. However, I don't see a compelling reason to jump in before the pandemic passes, since its growth could abruptly decelerate against some tough year-over-year comparisons as the competition squeezes its margins.