Digital is taking over far more than shopping and finance, and COVID-19 has fast-tracked digital adoption in many industries. Food is joining the digital revolution, and two of the top players are McDonald's (MCD 1.12%) and DoorDash (DASH -1.03%). McDonald's is the established leader in fast food, and DoorDash is the hot IPO. Which one is the better buy?
Leading in a new era
McDonald's is the largest fast food chain in the world with nearly 40,000 global restaurants, most of which are franchised. 2020 wasn't the greatest year for the burgers and fries giant as dining rooms were closed for a significant amount of time, but by the fourth quarter it had mostly recovered. Sales increased 1% and comps decreased 1%, but U.S. comps were positive at 5.5%. It opened 1,000 new restaurants during the year and renovated another 900. Most importantly, 25,000 stores -- in other words, more than half -- have a drive-thru, which gave it an advantage during the pandemic.
The company is leaning into digital, spending $1 billion on new technology. It's focusing on the three "d"s: delivery, digital, and drive-thru. To that end it's developing mobile order and payment as well as My McDonald's, a membership and rewards program.
These are elements that other restaurant chains, such as as Starbucks, have already implemented with results. It speaks to McDonald's power that its classic burger menu brings in high sales without these options, and to its strength that it's developing them to unlock even greater value.
Delivering what customers need
DoorDash is a delivery service that connects merchants with customers through independent drivers, or dashers. It services almost 400,000 merchants and 18 million customers with 1 million dashers, the company's term for its delivery people.
But it sees tremendous future potential. Its U.S. members represent 6% of the country's population, and its gross order value in 2019 of $8 billion is about 3% of the total of off-premise takeout order value. Revenue in the first nine months of 2020 was $1.9 billion, more than double the 2019 total.
The pandemic surely contributed to that super-sized growth, as people stayed in and ordered while under lockdown and social distancing rules. It remains to be seen whether the food delivery company can keep it up under post-pandemic circumstances.
DoorDash faces competition from Uber (UBER -0.04%), Grubhub (GRUB), and others, but it has the No. 1 spot with 50% of sales in the category. The issue for all of these companies is that they haven't figured out how to turn a profit. DoorDash's loss narrowed from $667 million in 2019 to $149 million in the first nine months of 2020, but management expects expenses to increase as it continues to develop operations. The company will release fourth quarter and full year results on Feb. 25.
The majority of businesses who partner with DoorDash are restaurants, but the company envisions working with all types of businesses, and this is what will ultimately determine if the company will eventually become profitable. It's already ambling down that path, securing partnerships with Albertson's (ACI 2.21%) for supermarket delivery and Walmart's Sam's Club to deliver prescription medications.
It also sees itself as a business partner and solution developer with its merchants to help them grow, and it acquired food robot prep company Chowbotics in February to help merchants scale their businesses. This step in a direction outside of but complementary to its core business is a positive sign for creating shareholder value.
Dividends and more
McDonald's pays a quarterly dividend that yields 2.4% and is growing. It gained 8.5% in 2020 and is flat year to date. It's become a cash machine, generating $4.5 billion in free cash flow in 2020 despite business disruptions, and it expects to return to pre-Covid levels of $5.5 billion to $6 billion in 2021.
DoorDash went public in December of 2020 and opened on the first day of trading at $182. The high valuation didn't last and its stock quickly went south, losing 24% from its first day closing price by the end of 2020. But it's already up 50% in 2021.
DoorDash has a lot of plans up its sleeve, but it's just too risky right now, especially trading as high as it is. There's no bargain here, even if it continues to grow.
McDonald's, on the other hand, is a safe bet with a secure dividend, and the better buy.