[I own DoorDash stocks.  This is not investment advice.  Please do your own due diligence.]

Earlier this month, DoorDash announced its 2023 Q1 financial results, which are generally robust.  I would like to share several pertinent points arising from those latest results.

Profitable Total Addressable Market (TAM)

Not all TAMs are created equal.   Some TAMs are profitable.   Some TAMs are unprofitable.  The profitability of TAMs varies considerably and typically cannot be easily discerned — because in most times, companies’ presentations tend to paint a rosy picture.

In our current environment, characterized by rising interest rates and softened consumer demand, distinguishing between profitable and unprofitable TAMs has become a bit easier.  With cheap funding dwindling, companies must demonstrate that they can actually make money.  This leads to cuts in subsidies, promotions, and other forms of marketing expenditures, which then results in a reality check.  Suddenly, this new set of dynamics allows investors to see the true nature of the TAMs that companies said they are targeting. 

Companies going after unprofitable TAMs may experience a severe slowdown or even a reversal in growth when marketing funds are curtailed.  This could occur due to various reasons, such as consumers’ unwillingness to pay (e.g., selling a product that the targeted population cannot afford on a frequent basis), an ill-conceived value proposition (e.g., selling a product that customers do not care that much about), or exorbitant cost structures (e.g., selling a product at a loss).  Conversely, companies targeting profitable TAMs will likely see a continued, albeit slower, growth after they cut their marketing spend.  Continued growth can be attributed to a mix of different factors.  For example, consumers are willing to pay; consumers love the product; or, product unit economics are inherently profitable.  The best TAM is one that facilitates company growth without the need for substantial incremental marketing investment.  At this point in time, many tech companies are downsizing their marketing budgets, and the resulting impacts on their top lines diverge across companies.  Some companies are still growing.  Some companies are shrinking.  That is quite telling, isn’t it? 

In the case of DoorDash, available data suggests it is capitalizing on a profitable TAM. DoorDash’s core business unit — U.S. Restaurant — is generating substantial profits, with some analysts estimating its adjusted EBITDA at over $1.5B per annum.  This level of profits comes after DoorDash has consistently been reducing how much it charges its customers (i.e., reducing “average transaction fees per order”).  And, after DoorDash reined in marketing spend, its core business continues to grow steadily at a pace of 15% YoY (by number of orders, my estimate).  Moreover, DoorDash’s new verticals are also demonstrating strong growth with improving unit economics.  On the earnings call, DoorDash CEO Tony Xu announced that “we’re now acquiring more new customers into the grocery and convenience sectors than anyone else for the first time.”  Now, and for the near future that I can see, DoorDash is in a strong position. 

Advertising Revenue as a Double-Edged Sword

Selling ads can contribute significantly to a company’s bottom line.  It is revenue without much accompanying costs.  However, excessive advertising can compromise user experience, therefore reducing user engagement.   Imagine the next time you search something on Google and the first 20 search results are ads; going forward, you probably will use Google less.  Advertising fuels bottom line growth but can hurt top line growth. 

Several gig platforms have embraced advertising. For instance, Uber’s ad revenue run-rate exceeded $500M in 2022 Q4, and it anticipates $1B+ in ad revenue by 2024 (~0.6% of 2024 GMV [“Gross Merchandise Value”], my estimate).  Delivery Hero’s ad revenue run-rate surpassed EUR 750M in 2022 Q4 (~1.7% of GMV) and it expects EUR 2B+ of ad revenue by 2024/2025 (~3.5% of GMV, my estimate).  Instacart, reportedly, generated $740M of ads revenue in 2022 (~2.6% of GMV).

Contrastingly, DoorDash, the largest local commerce platform in the U.S., has decided not to overly prioritize selling ads. Instead, DoorDash emphasizes the potential risks associated with excessive advertising and the tension between delivering good returns on ad spend to merchants and delivering good user experience to consumers — and DoorDash states unambiguously that its aim is to achieve a healthy balance between the two, if not tilting toward the consumers end.  

I directly quote Tony Xu, “given the high standards that we’re trying to put out for ourselves, which is on the one hand, we certainly have to meet the goals and create best-in-class return on ad spend for advertisers and merchants. And on the other hand, we also have to achieve the best possible consumer experience where there is little to no degradation in terms of what consumers expect to see. And this is hard to do because I think it’s really important to remember that with any marketplace business and certainly any desire to build an ads business, the most important thing is the engagement of the marketplace [bold is mine].”

DoorDash, coming from a point of strength, points out the truth behind advertising revenue.  It is not that DoorDash cannot find enough merchants to do ads on DoorDash but that it chooses to restrain ad revenue for the long-term health of the business. 

Rising Insurance Costs

In recent years, escalating insurance costs to cover driver accidents have become a significant concern for investors in gig platforms. However, a close examination of DoorDash’s 10-Ks and 10-Qs suggests that the company’s insurance costs are significantly lower than Uber and Lyft.

Measured against GMV, DoorDash’s insurance costs are at around 0.16% (2022), 0.11% (2021), 0.09% (2020), and 0.06% (2019) — i.e., during 2022, for every $100 of transaction that took place on DoorDash, DoorDash pays out $0.16 to cover driver accidents. 

Lyft’s financial results suggest that Lyft has been paying somewhere between 1.5% to 8.5% of its GMV to cover driver accidents, depending on the year and the quarter (as the occurrence of accidents vary throughout time).  Uber’s number is probably in the same neighborhood as Lyft’s, but a bit lower due to the fact that Uber’s business is geographically diversified (as accidents cost more in the U.S. than most other places).  

Structured lower insurance costs appear to be another advantage of DoorDash’s business model over ridesharing. 

(END)