[I own DoorDash stocks and I may change my opinions anytime. This is not investment advice and please do your own due diligence.]

DoorDash announced its 2023 Q2 results earlier this month. All-time high monthly active users, all-time high order frequency, all-time high market shares in the U.S. and across many international markets — and, all these “all-time high” metrics are still growing. Across business lines, unit economics are also improving. The company’s bottom line, measured by Adjusted EBITDA, has almost tripled from a year ago.

DoorDash was underestimated. And I think it is probable that DoorDash will continue to be underestimated.

DoorDash’s Growth Is Underestimated

When looking at DoorDash, many observers come to a quick conclusion: DoorDash is not going to do well. Common views are something like these: With the current levels of penetration, there is not much growth left in DoorDash. With layoffs and inflation, consumers will order food delivery less. And with Uber Eats, DoorDash will be “competed away.”

I disagree. I argue DoorDash’s growth is underestimated. And a fundamental reason that gives DoorDash strength is the fact that DoorDash is perceived by most consumers as “the eating app.” Among e-commerce categories, eating is possibly the most promising category that has ever existed. And DoorDash is uniquely positioned to benefit from this reality. Let me explain.

One, “eating” is durable. Humans eat. Humans must eat. It is hard to imagine that in ten or twenty years, somehow, due to technological advancements, humans will stop eating. Unlike some technologies or software products that can actually become either obsolete or irrelevant for some reason, eating is simply not going away.

Two, “eating” is high frequency. Most people eat at least twice or three times a day. There are probably no other consumption activities that have a higher frequency than eating. We do not order from Amazon.com several times a day. We do not go to grocery stores several times a day. But, nearly all humans eat several times a day, every day of the year.

Three, Americans cook less and less. An abundance of research papers and surveys have made the same finding — Americans have been cooking less and less. For example, the USDA has almost 90 years’ worth of data showing that Americans have been spending a higher and higher percentage of their total food expenditure on food cooked outside of their homes. A 2011 paper issued by the OECD found that the U.S. is the “only country where both the participation rate and mean time for cooking are at the bottom of the ranking [of the 28 countries for which data are available]. In other words, the American population attaches on average little importance to cooking relative to the other surveyed countries” (source link). So, not only do Americans cook less and less, but Americans also cook the least and do not mind not cooking when compared with people in other OECD countries!

After all, eating and cooking are different. Most people enjoy eating. But not all people enjoy cooking. Eating is not optional. Cooking is optional. You cannot hire someone to eat for you. But you can hire someone to cook for you. That’s the point. And therefore, there is a space for food delivery — and in America, that space is even bigger!

Four, consumers order food delivery for many different reasons. We do it to survive (“consumer staples”). We also do it to enjoy (“consumer discretionary”). This means food delivery has a myriad of behavioral and cultural tailwinds at its back. Therefore, as the economy goes up and down, as the inflation goes up and down, as the employment situation goes up and down, the likelihood is that we will continue to see solid demand for food delivery.

If you are still concerned about DoorDash is a consumer discretionary service and could not weather a weakening economy well, let me point out something: In DoorDash’s 10-Q filing for 2023 Q2, on page 63, the entire paragraph that describes DoorDash’s service as “generally considered to be discretionary” and therefore “any decline in consumer spending would have a disproportionate effect on our business relative to those businesses that sell products or services considered to be necessities,” this investor warning was completely DELETED! This deleted message had previously appeared in every single one of DoorDash’s historical 10-K and 10-Q filings; it was even in DoorDash’s IPO Prospectus. DoorDash just removed that message. Is that interesting? Signal!

(Actually, in 2022, I wrote explicitly on my blog, arguing that DoorDash is not “consumer discretionary.” See the blog here. I am glad the “discretionary” language is now deleted from DoorDash’s own filing.)

Five, opposite to many other countries, in the U.S., consumers order food delivery more often than they order grocery delivery. In countries like Brazil, India, and China (counting in “community group buying”), on average, consumers place more grocery delivery orders per month than they do for food delivery. For example, in Brazil, on a monthly basis, an average user places about five grocery delivery orders (counting out “quick commerce” orders) but fewer than four food delivery orders. In America, however, the corresponding monthly numbers are two to three grocery delivery orders and four to five food delivery orders. There could be many reasons behind this discrepancy between the U.S. and these other nations, ranging from living conditions (e.g., Americans tend to live in bigger homes with bigger fridges and drive bigger cars) to food production and packaging (e.g., how milk is packaged determines milk expiration, thus influencing grocery shopping frequency).

Six, most of the growth of U.S. food delivery is taking place outside of big American cities. As a percentage of the overall food delivery market in the U.S., big cities are becoming smaller and smaller. This trend has direct implications for DoorDash and its domestic competitors Uber Eats and Grubhub. For Uber Eats, we have to think about Uber. “Uber” as a brand has an urban vibe to it. Uber’s consumer mindshare is strongest in big cities and is weakest in more rural places. After all, outside of a few big American cities, almost everybody drives, resulting in weak consumer awareness of the Uber brand, including Uber Eats. DoorDash, however, does not have that “urban” label stuck on it. This, I think, is one of the many reasons why Uber Eats, while popular in big cities, finds it hard to further expand its market share outside of big cities. Moreover, because most financial analysts live and work in big cities, the analyst community tends to under-appreciate the unique geographical strength DoorDash has outside of big cities — after all, “out of sight, out of mind” it is.

Because big cities are becoming proportionally “smaller” with time, this trend spells trouble for Uber Eats and Grubhub on an ongoing basis — Uber Eats and Grubhub are likely to see their national market shares continue to shrink. Time is on DoorDash’s side.

Therefore, given these considerations, I was not surprised by DoorDash’s strong fundamental performance.

On this note, let me share a quick thought: I am concerned about Instacart, in terms of its long-term growth prospects and long-term business sustainability. Time will tell.

DoorDash’ Profitability Is Also Underestimated

For a while, DoorDash was a consensus short for investors and traders, because many were sharing a similar view that DoorDash would never make any money.

DoorDash’s management probably noticed what was going on in the analyst community and they took decisive actions to smash that echo chamber. In DoorDash’s 2022 Q3 investor letter, for the first time, DoorDash revealed the dollar figure of how much money its U.S. Restaurant Marketplace business (the “core business”) was making. The core business’s contribution profit was annualizing at a rate of ~$2.4B a year, equivalent to a GOV margin of ~5.1%. The echo chamber cracked open. DoorDash’s timely disclosure effectively put a floor on DoorDash’s then declining stock price.

At its latest earnings call, DoorDash’s CFO Ravi Inukonda suggested that the old ~$2.4B figure has “grown substantially since that point.” Ravi also disclosed that the unit economics of DoorDash’s core business continue to improve.

Assuming the improvement of unit economics follows DoorDash’s own historical trend (based on actual historical trendline) and assuming ~20% of DoorDash’s revenue goes into paying fixed costs (also based on actual financial figures), then, as of 2023 Q2, DoorDash’s core business is probably making a cash profit of roughly $1B to $1.5B a year (non-GAAP, before SBC) — which, for DoorDash’s stock valuation, translates into a P/E multiple of 18x-27x. DoorDash, in all likelihood, is currently losing a meaningful amount of money on its new verticals (e.g., grocery, convenience, international markets, etc.). As new verticals continue to see their unit economics improve, DoorDash’s profit dollar will increase rather rapidly, resulting in a bigger and bigger “E,” causing the aforementioned P/E multiple to trend downward, thus making DoorDash stock cheaper and cheaper.

An important point about DoorDash’s underlying profitability is that the mathematical relationship between DoorDash’s top line growth and bottom line growth is non-linear. Some of the key drivers of DoorDash’s increasing profitability are cohort maturation (older cohorts carry higher profitability) and network effects (a denser network means lower fulfillment cost). So, it is highly likely that we will continue to see DoorDash’s bottom line grow significantly faster than its top line.

If you are still not convinced, just see what DoorDash’s management has to say. In DoorDash’s 2023 Q2 letter, CEO Tony Xu wrote the following: “If we execute to the plans we have established, it may become difficult to offset improving profitability with new investments.” In DoorDash’s 2023 Q2 press release, DoorDash’s management said, “Y/Y growth in revenue was higher than Y/Y growth in Total Orders and Marketplace GOV despite increased investment in consumer retention and acquisition initiatives.” Well, think about it. Costs are made to grow (a deliberate decision by management), helping GOV and Total Orders to grow, but revenue grows even faster. The logic strongly implies DoorDash’s overall profitability is on the rise. I mean, that is probably as close as Tony and his team can get, in order to hint at what might be coming.

Lastly, here is the beautiful thing — DoorDash’s growing profitability is natural, not artificial, not a result of some sort of draconian business pivot or to-the-bone cost cutting. On Aug 2, 2023, in a CNBC interview with Jim Cramer, Jim said to Tony that “you are pivoting!” And Tony replied, “I wouldn’t call it a pivot. This is natural growth… It is very healthy, very natural top and bottom line execution.” DoorDash is a well-oiled machine.

Summary

To sum up, because the U.S. has its unique eating culture, DoorDash’s growth and profitability will continue to be underestimated by many non-U.S. investors. Because modern-day food delivery is a newer phenomenon in the U.S. than in some other countries, DoorDash’s growth and profitability will continue to be underestimated by many U.S. investors. Because financial analysts mostly are urban dwellers, DoorDash’s strength outside of big cities will continue to be underestimated by many financial analysts. That’s why I say most investors will continue to underestimate DoorDash.

One more thing. Although the certainty of DoorDash’ business has increased, in light of the strong performance of its stock price over the past several months, the rate of return in DoorDash’ stock going forward in the upcoming periods has probably decreased versus the immediate past. This is something to watch out for.

Risks

Key person risk, geopolitical risks

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