The food delivery industry is growing rapidly. Accelerated by the pandemic, U.S. food delivery revenue hit $26.5 billion in 2020, up 204% over the last five years, and that figure is projected to grow to $42 billion by 2025. The market leader is DoorDash (NYSE:DASH). Its delivery network generated $8.2 billion in gross order volume (GOV -- the total amount of dollars flowing through a platform) last quarter alone.
DoorDash went public in December, raising $3.4 billion in one of the largest initial public offerings of 2020. Olo (NYSE:OLO), a software-as-a-service (SaaS) platform that enables restaurant chains to operate efficiently with all these new on-demand and delivery solutions, just went public a few weeks ago, and it is another fast-growing company within the space.
But which is the better buy: DoorDash, the leader in food delivery, or Olo, which provides the software that enables restaurants to operate in the digital age?
The case for DoorDash
DoorDash had a banner year in 2020. Revenue grew 226% to $2.89 billion, adjusted gross profit hit $536 million in Q4 (up 297% year over year), and it finally generated positive free cash flow, to the tune of $146 million. One big knock on food delivery companies like DoorDash is their history of recording huge losses due to all the money they have to pay to drivers and restaurants in order to keep everyone in the system happy. While $146 million in free cash flow isn't eye-popping for a company of DoorDash's size, it shows that the business can generate cash while still investing in growth.
Management is guiding for GOV in the $30 billion to $33 billion range in 2021. Assuming DoorDash keeps up its 12% take rate, at the high end of that guidance range, that would amount to $3.96 billion in revenue, up 37% from 2020. With a market cap of $42.6 billion, that gives DoorDash a forward price-to-sales ratio (P/S) of just under 11. This doesn't seem high compared to other tech start-ups or recent IPOs, but investors should remember that the company has to pay its many drivers (called Dashers) and its restaurant partners the majority of its revenue, which will put a cap on its long-term profit margins.
The case for Olo
Unlike DoorDash, which caters to consumers through its own third-party delivery service, Olo works with restaurants to enable digital ordering and delivery through its SaaS platform. Specifically, it works with large restaurant chains like Chili's, Five Guys, and Dairy Queen. Through its three software modules (Ordering, Dispatch, and Rails), Olo helps them manage their digital presence on platforms like DoorDash and keep customer orders on one centralized platform, theoretically saving time for workers while also keeping the customers happy.
Last year, Olo had $98.4 million in revenue, up 94% from 2019. Like DoorDash, Olo definitely got a boost from the pandemic, as some of its products are paid for on a usage-based model. (For example, some restaurants pay a small fee every time someone places a digital order via Olo.) However, unlike DoorDash, Olo has high margins because of its pure software model. Last year, gross margins were 81%, while operating margins hit 16%. That it was able to grow so quickly while also generating positive operating profits indicates that it should have high operating margins at scale.
Right now, Olo has a market cap of $4.1 billion, giving it a P/S ratio of more than 40. That's expensive no matter how you frame it. However, if Olo can win more restaurant chains as clients over the next few years while also sustaining high gross and operating margins, that metric should eventually come down.
There's a lot to weigh when considering whether DoorDash or Olo is a better stock to buy now. Olo has better unit economics, while DoorDash is the dominant player in the industry, and has a huge cash pile of $4.3 billion. It is also launching its own white-label product similar to Olo's, which indicates it might start directly competing with its software partner.
However, what tilts the odds in Olo's favor over the long term is the fact it provides value for its customers, creating a win-win scenario that leaves all parties happy. DoorDash, on the other hand, extracts value from its partners, with restaurants constantly complaining that its high delivery fees are unsustainable. While investors should temper their expectations for Olo due to its sky-high valuation, its business is better set up to win over the long term than DoorDash's is.