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

DoorDash reported its 2023 Q4 earnings in mid-February. The company grew its Total Orders by 23% YoY and its Gross Order Value (GOV) by 22% YoY. Its adjusted EBITDA has more than tripled versus a year ago. Its Free Cash Flow (FCF) continues to grow; after deducting stock-based compensation expenses, the “adjusted” FCF is positive and growing.

Since as early as 2021, I have been writing on my personal blog about how great DoorDash’s business is (see my first piece here). It was a time when eminent short sellers were criticizing DoorDash for its senseless business model and ridiculous stock valuation. Over the past few years, and especially over the most recent few months, many things have changed. For one, during the first quarter of 2024, among all the major technology stocks listed on the Nasdaq — use the Nasdaq-100 Index as a proxy here — DoorDash finished the quarter as the No.3 best-performing stock of all! That is quite unusual, given DoorDash is neither an AI-stock nor an event-driven stock. For another, also during the first three months of this year — and I counted — sell-side analysts upgraded or raised target price on DoorDash for approximately 40 times! That is about one bullish sell-side report every other day.

When most people are choosing to sit on one side of the table, the better choice is to check out the view from the other side. That is what a reflective observer should do. For me, continuing to write about “what is going well” with DoorDash risks regurgitating the same content again and again, which not only is boring for me to write and for my readers to read but also is potentially damaging to my own thinking process. That almost goes into the definition of confirmation bias: the tendency to process information by looking for, or interpreting, information that is consistent with their existing beliefs (source link). So, instead of writing about “what is going well,” I should write about “what can go wrong.” By attacking the same topic from a different angle, it will not only inject a sense of freshness into my thinking process but also reduce the level of confirmation bias in me so that when and if the time calls for it, I can change my mind quickly, in a decisive, genuine way.

So, what can go wrong with DoorDash? I can see at least the following three sources of risks:

Competitors Taking Shares in the American Suburbs: The continued geographical expansion of Uber and Lyft, in particular their “Reserve” function, is encroaching on DoorDash’s traditional strongholds — the American suburbs. Traditionally, Uber and Lyft is a big city phenomenon, serving as a “private layer” on top of big cities’ public transportation systems. Outside of big cities, most people drive, so few people would think of Uber and Lyft. However, in recent times, Uber and Lyft have been gaining traction in the suburbs, which I fear might materialize into something much bigger. One, there are indications that the idea of car ownership is becoming less prominent among younger generations, who show a preference for using ridesharing apps over owning a car. For example, Americans are getting driver’s licenses later and later in life (source link). Two, the “Reserve” function on Uber and Lyft appear to be gaining the attention of suburban consumers. In Feb 2024, Uber CEO Dara Khosrowshahi said at an investor meeting that “40% of Reserve volume is not airport related at all. And of these, the majority originate in the suburbs, meaning Reserve is unlocking users outside of our urban cores where our network is less dense. The suburbs have been a persistently challenging place for on-demand rideshare to break into. So, the traction we’re seeing with Reserve is very promising.” In other words, 60% of Reserve volume are airport trips and most of the remaining 40% of Reserve volume are trips originating in the suburbs that are not going to airports.

So, it is fair to say that there are now more Uber drivers in the U.S. suburbs than probably ever before. This can be an alarming development for DoorDash, as Uber has a demonstrated record of using “cross over” drivers (those who drive both passengers and food packages) to fulfill food delivery orders. One can argue that ridesharing drivers are compensated more than food delivery drivers, so it might not be economical for Uber to use its ridesharing drivers to deliver food in the suburbs. True. But what is also true is that the food delivery business in the suburbs is much more profitable than in big cities — the suburbs enjoy higher average order value (AOV) and easier driving and parking, which means for an average food delivery order, the topline is bigger and the cost basis is lower, resulting in a larger profit. Here, the balance is an intricate one — more ridesharing drivers in the suburbs, and suburbs being a more profitable food delivery market. Would Uber Eats be able to take more shares in the suburbs, given the suburbs’ higher profitability is able to support “cross over” drivers to deliver food packages? Or would DoorDash be able to defend its market share in the suburbs, given its current leading position over Uber Eats? This is a consequential question.

Potentially Losing Out on Germany and Japan: Wolt, the Nordic food delivery company that DoorDash acquired in 2021, is a high-ambition, high-octane company. It has a strong track record of “coming from behind” — winning from a disadvantageous starting position. Founded in Helsinki in 2014, Wolt today operates in approximately 30 countries with key corporate offices in Helsinki, Berlin, Copenhagen, and Israel. According to my research, in many of Wolt’s markets, especially the mature ones such as Northern Europe, Wolt’s food delivery businesses are highly profitable and have been so for a long while. In many of the less profitable markets, Wolt is quickly gaining shares. However, the picture in Germany and Japan is more nuanced, if not concerning.

Germany is the first “big country” launch for Wolt. The market in Germany is bigger than the entire Nordic region combined. But, Germany is a terribly difficult market for food delivery. One, high cost. Germany does not allow gig workers, so all couriers are employees. Two, low AOV. Based on my research, food delivery AOV is ~20% lower in Germany than in other advanced economies like the UK. Three, intense competition. Due to Germany’s size (relative to other European countries), the German food delivery market has a history of attracting competition. Just to name a few delivery companies that have tried in Germany: DoorDash (merged into Wolt), Wolt (active), Uber Eats (active), Lieferando (active), Delivery Hero (exited Germany twice), Deliveroo (exited), Gorillas (acquired), Getir (active), Flink (struggling, reportedly in merger talks). Heightened competition means that in Germany, it is more expensive to acquire and to retain drivers and customers. Ultimately, it is shareholders who are footing the bill to sustain a company to operate in such an environment — high cost, low AOV, intense competition.

Japan is probably the biggest bet Wolt has ever made. Japan is geographically far away from Europe with a distinct business culture and consumer culture. It is probably because Japan is perceived as the world’s fourth largest food delivery market (after China, the U.S., and South Korea) that Wolt bet big on Japan. After entering Japan in 2020, Wolt hired aggressively and launched in a large number of Japanese cities. However, local player Demae-can has been around since 1999 and Uber Eats has been operating in the country since 2016. Versus Uber Eats, Wolt is four years late to the Japanese market — which is hugely disadvantageous against Wolt as food delivery is a network effect business. In addition to being late to the party, several other elements make the Japanese market particularly hard for Wolt. One, Japanese consumers appear to be more “loyal” and “sticky” versus consumers elsewhere — so, Japan is a harder market for Wolt to win over users from competitors. Two, courier cost is relatively high in Japan, probably a result of Japan being a developed economy without a significant immigrant population — an inconvenient combination from the labor market perspective, indirectly impacting food delivery businesses. Three, Japanese restaurants in general inflate menu prices on food delivery apps by ~30%, a practice that was probably introduced by Uber Eats to compensate for high courier costs — so, food delivery is seen as being luxuriously expensive and consumer demand for food delivery is not as vibrant as it is in other countries, a headwind working against Wolt’s ambition for Japan. Four, convenience stores are everywhere in Japan, offering quick and affordable meal options — so, Wolt faces a competitor that is convenient and affordable (and faster and cheaper) and this competitor will probably never go away. So, will Wolt make it work in Japan? So far, we haven’t heard any meaningfully positive updates about Japan from DoorDash’s earnings calls. I am not sure either.

An alternative way to interpret DoorDash’s and Wolt’s past successes is to see them as a history of actively avoiding direct competition with Uber. In the past, DoorDash expanded into the U.S. suburbs where Uber didn’t have coverage. Wolt started in smaller European countries where the markets were too small for Uber to prioritize. But Germany and Japan are categorically different. These two markets are meaningful markets for Uber. Uber is not going anywhere when it comes to Germany and Japan. The game is not going to be easy this time for DoorDash and Wolt.

DoorDash’s and Wolt’s company histories are decorated with continued and sustained business successes. They have never retreated from any major markets. And that could be a problem here when considering Germany and Japan. In Dec 2023, at the Slush 2023 conference, DoorDash CEO Tony Xu said, “there’s the part about being the most patient capital for him [Miki Kuusi, CEO of Wolt] where he doesn’t have to make, you know, decisions based on the quarter or based on the next fundraising milestone.” In a Jan 2024 interview with Norges Bank, Tony said, “…inventing new businesses where you want to be stubborn about, you know, the vision of where you want to go and what the job to be done for the customer is, but you have to be super creative, patient. and open-minded about the path in which you’re going to get there” I speculate that Tony and Miki want to be “stubborn” and “patient” with Germany and Japan until they can make it to work. We will see. No risk, no return. For sure. With bigger market opportunities come bigger risks — i.e., lose money in a big way and lose it quickly. The key is to “cut losses” if it is truly not working. Can the leadership at DoorDash and Wolt swallow their pride and make the hard decisions if needed? If so, the next question is also a hard one: What does exiting a large market mean to employee morale when the company itself almost never has had a major and public retreat before? Is it equivalent to a public humiliation? Is that the reason why the leadership so far still hasn’t pulled the plug?

Heightened Stock Valuation: Regardless of how great a business is, investors may still not make money if they paid a terrible price. Over the past year or so, with the changing mood of the general market and with the changing investor perception of DoorDash, DoorDash has seen its stock valuation gradually rise from ~0.2x in Oct 2022 to ~0.7x now (measured by “enterprise value–to–GOV” multiple). If investors believe DoorDash’s profitability will reach 3% of its GOV, that implies an earnings multiple of ~23x for now (= 0.7 / 0.03). If DoorDash’s profitability can reach 5% of its GOV, the implied earnings multiple would be ~14x (= 0.7 / 0.05). For a company that is growing its topline by about 20% a year, in three years, these two numbers will change from “23x and 14x” to “13x and 8x.” Are you willing to pay an earnings multiple of 8x to 13x to bet on a business 1) to continue to grow its topline by about 20% a year for the next three years at least and 2) to achieve a profitability level of 3-5% of GOV? Given the heightened valuation, this question must be fully answered in a disciplined and analytical way, or investors risk making a major investment mistake.

Having said all this, I remain positive on DoorDash. However, at this stage, given the significant changes in investor perception toward the upside, I believe it pays more to focus on the downside. And, I hope I am both right and wrong. Right in the sense of identifying the most prominent risks correctly. Wrong in the sense that those correctly identified risks never materialize. Time will tell.

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