[Full disclosure: I own DoorDash stocks. This is NOT investment advice. Do your own due diligence.]

I have been bullish on DoorDash since early 2021. Finally, I got some time to share my thoughts here on the blog. Because it is a short blog piece, I only have space to highlight a few key topics.

Bullish views

In many Asian countries, food delivery apps have fundamentally changed how people eat. These apps are convenient and affordable. In some cities, food delivery apps have achieved “cost parity,” meaning paying for food deliveries costs about the same as buying ingredients and cooking them at home! Bullish investors bet food delivery’s success in Asia can be replicated in the U.S.

Bearish views

Citron Research’s report on DoorDash, published on December 17, 2020, summarized some of the most prominent bearish views. They are as follows:

• The food delivery space has almost no entry barrier.
• DoorDash has zero differentiation in its service and zero switching cost for its app.
• If DoorDash cannot make a profit during the pandemic, it may never be profitable at all.

I believe these bearish views are ungrounded. Let me explain.

Delivery cost–driven flywheel

Difficulty: Among all delivery types, food delivery is the hardest. Delivery platforms have only approximately 35 minutes to get a delivery right. There are no centralized logistics hubs or full-time drivers. Consumers are hungry and eagerly waiting. Restaurants are scattered around. Drivers drive for these apps on a “voluntary” basis. Freshly cooked meals are super perishable. Combining all these challenges together, that is why food delivery is exceedingly difficult.

Cost: Food delivery, from a labor perspective, can be very expensive (“can be,” not “must be”). In most cases, a food delivery driver carries only one bag of food for one customer. That is 20 minutes of a person’s time, plus gasoline and various hidden costs such as auto insurance and vehicle maintenance. So, food delivery can be expensive.

Therefore, successful food delivery demands huge capital investment and heavy technology input.

From a food delivery platform’s perspective, the economics of a delivery order look like this (I will refer to these economics in later sections):

Net Revenue = Consumer Fees + Restaurant Fees – Delivery Cost*;
Earnings = Net Revenue – Cost of Revenue – S&M – R&D – G&A

*Delivery cost is defined as the amount of money the platform pays to one driver to complete one delivery order

Entry barrier: A food delivery platform must retain enough drivers to respond to incoming orders. Drivers on average expect to earn $20 an hour (including tips). The platform must also generate a positive “net revenue,” (see the formula above) otherwise the platform will hemorrhage cash and fold. I calculate that, in order for these two conditions ($20 hourly earnings and a positive net revenue) to be met, each delivery driver should receive at least 1.3 orders per hour. That is a lot of delivery orders to be generated by the platform. Entry barrier!

Flywheel: DoorDash jump started its flywheel by expanding the “supply side” — onboarding as many restaurants as possible. A wide selection of restaurants attracts a wide range of users. A large user base generates a large order flow, which sustains a large driver base. Restaurants. Users. Drivers. DoorDash’s flywheel starts spinning.

Delivery Cost: The idea of “cost deflation” also applies to a food delivery network — high order density leads to low delivery cost. A low delivery cost allows the platform to lower commissions on both ends (merchants and consumers), which attracts more merchants and customers, which increases order density, which then lowers delivery cost even more. Call it the network effect. Call it the scale effect. Call it an entry barrier. DoorDash’s flywheel spins faster and faster!

In a nutshell, delivery cost is the key. It powers DoorDash’s flywheel. It helps DoorDash win competition. It can help DoorDash become profitable.

Using public data, I built a proprietary algorithm that can “back out” DoorDash’s historical delivery cost. See below. DoorDash’s delivery cost is indeed shrinking with time! (Fun fact: at its inception in 2013, DoorDash charged a flat delivery fee of $6 per order, which fits nicely onto my chart.)

Social value-add

I increasingly believe that food delivery work adds value to society. Versus many full-time jobs and other gig jobs, food delivery jobs are fairly inclusive, safe and comfortable. Delivering food also pays relatively well, given the prospect for higher customer tips. The facts speak for themselves:

• Most Uber drivers are men. Most food delivery drivers are women.
• In some cities, DoorDash is a source of income for deaf people.
• While Uber and Lyft still struggle to find enough drivers, DoorDash acquired more Dashers in Q2 2021 than ever.

Superb management

DoorDash is the only major food delivery platform in the U.S. that is still run by the original founder. Tony Xu founded DoorDash in 2013 when he was completing his MBA at Stanford GSB. John Doerr is an early investor and reportedly, John said that Tony reminded him of Jeff Bezos. John noted that both Tony and Jeff are similarly focused on great customer experience.

When Tony was five, Tony migrated with his parents from China to the U.S. Tony’s mother used to run a restaurant and Tony himself had personally worked in restaurants. Again, Tony is probably the only delivery platform CEO who had real restaurant experience. Even now, Tony still personally carries out DoorDash’s frontline customer service work every month, such as delivering food himself.

Tony pays attention to details, and he expects the same from his people. At DoorDash, Tony fosters a culture that is writing-heavy and analytical-driven. Tony strongly believes in the long-term goal of growing and empowering local economies, and he knows how to do the right thing to get there, even though the right thing often is the hard thing — food delivery!

The other unique thing about Tony, I should “speculate,” is that, given Tony’s background, he probably has studied Meituan’s success and has drawn a few lessons. What a strategic edge for DoorDash!

Future growth areas

Aside from the core business of food delivery, there are several other growth areas for DoorDash:

• Non-restaurant categories
  • → increase order density
• Delivery as a service (“DaaS”)
  • → increase density & margin
• International markets
  • → increase GOV
• Advertising business
  • → increase margin
• Ghost kitchens
  • → increase density & margin
• Disintermediate credit card processing fee
  • → can increase margin by 20 percentage points!

Profitability and Valuation

Profitability: If DoorDash’s flywheel spins faster and faster, its delivery cost will continue to decline. In terms of profitability, the future DoorDash could potentially become the old Grubhub. Prior to 2018, because Grubhub was then a demand-gen business with no delivery cost, Grubhub enjoyed a take-rate of 15%, a gross margin of 75% and an adjusted EBITDA margin of 25% to 30%. By continuing to reduce delivery cost, DoorDash can aim for that kind of profitability profile as well. It has been done before. There is no reason to believe it cannot be done again.

Valuation: In rough numbers, a 10x P/S multiple translates to a 30% profit margin and a 33x P/E multiple. High terminal profitability supports today’s high P/S multiple.

Risks

• Labor: External interventions on labor, causing delivery cost to surge, damaging profitability profile.
• Disruptive technologies: Autonomous driving and drones have the potential to disrupt DoorDash’s flywheel.
• Customer acquisition cost (CAC): For an online business, its cost structure consists of two key components: delivery cost and CAC. For the past two years, I calculated, DoorDash’s CAC was approximately $40 (w/o promo spend) or $70 (w/ promo spend). Coming into 2021, DoorDash’s CAC seems to have increased substantially. Runaway CAC can damage profitability profile, ultimately hurting shareholders.

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