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

DoorDash had a solid first quarter, growing its top line by over 20% year on year, gaining market share across all business lines, across almost all country markets. In terms of the company’s bottom line, “U.S. restaurant” has been the cash cow for a long while and “U.S. new verticals” and “international markets” are still in the red — and the unit economics of all these three business lines continue to improve.

As I wrote in my prior piece (link), recently, more observers have come to understand the attractiveness of DoorDash’s business fundamentals. For this reason, a more prudent way for me to think about DoorDash now is to think about “what can go wrong” — so that, if the time calls for it, I can change my view as needed.

Here are three areas of “what can go wrong” that I think are worth highlighting after DoorDash announced its 2024 Q1 results.

Gig-Worker Regulations Could Impair Food Delivery Companies’ Ability to Create Value: Companies like DoorDash create economic value in many ways and one of which is by increasing labor market efficiency. By matching labor supply and labor demand efficiently, with scale, and in real-time, DoorDash and its peers can help eliminate labor market inefficiency and capture the accompanying economic value. In recent months, two American cities — Seattle and New York City — have both introduced regulations that can impair food delivery companies’ ability to create value.

In Seattle, the city council recently raised food delivery driver pay to a level of $26.40 per hour (before tips, and is over 30% above local minimum wage), plus $0.74 per mile, and $5 minimum per order. According to my calculations, the impact of this government-imposed pay package could amount to an additional cost to a food delivery platform that is equivalent to 10%–20% of the Gross Order Value (GOV) that goes through the food delivery platform (warning: it is a very rough estimate that I did!). DoorDash’s current take rate is 13.1%. So, this added cost could result in a total wipeout of DoorDash’s revenue from Seattle, if not causing revenue to become negative! That is probably why DoorDash spent half a page in its 2024 Q1 earnings press release to discuss the impact of gig work regulations. That is also why “Seattle” has been mentioned seven times in DoorDash’s earnings call this time. For New York City, the story is similar (though might be less severe than Seattle).

Fortunately, there is some good news to balance out this perspective. One, by my estimate, Seattle and New York City are less than 2.0% and 2.5%, respectively, of DoorDash’s U.S. GOV. Two, the Seattle regulation, unsurprisingly, has backfired in a big way (consumers order less, merchants sell less, drivers have less work) and reportedly, the local city council is in the process of revising the regulation to be more business friendly (source: news). Three, in California, “Prop 22” seems to have gained support from the California Supreme Court, as seen at the oral argument that was held on May 21 — which means, challenges to invalidate “Prop 22” are unlikely to succeed, preserving the “gig worker” status in California.

Grocery Expansion Could Be More Challenging Than Expected: DoorDash’s grocery delivery business has been growing at a pace of over 100% YoY for the past three quarters, growing faster than competitors and gaining market share. While optimism abounds, some concerns remain. One of the bigger concerns, as I increasingly come to see, is that DoorDash’s grocery delivery business may find it more challenging than expected to compete with Instacart.

The problem appears to be that Instacart has some of the best users in grocery delivery, who default to Instacart and who do not respond to DoorDash’s efforts to attract them. On the surface, the symptom of this problem is “average order value” (AOV). The AOV of a grocery delivery order on DoorDash is estimated to be around $50 (source: third-party data vendors) while the same number on Instacart is well over $100 (source: Instacart’s official disclosures). Many observers understand the cause behind this symptom as such: Instacart was there first. Instacart was launched in 2012, some eight years ahead of when DoorDash launched its grocery services, a lead that constitutes a “first-mover advantage” that allowed Instacart to capture high-AOV users, leaving few high-AOV users for DoorDash. I tend to think so as well.

Going forward, however, with DoorDash actively participating in the grocery delivery game, I am concerned that DoorDash may still fail to capture the high-AOV customers. And this time, the cause of the problem would no longer be DoorDash’s lack of participation but rather DoorDash — the brand “DoorDash” itself.

As a brand, “DoorDash” is associated with the sensational appeal of “get me food now,” “give me that thing now.” You do not order tomorrow’s dinner on DoorDash today. You order on DoorDash when you are feeling hungry now. For most people, “DoorDash” stands for “spontaneous,” “unplanned,” “without premeditation”; DoorDash is not “regular planning that requires detailed thinking.” And that latter is what large-AOV grocery delivery orders are about: recurring grocery trips that are planned ahead of time. Consumers typically plan ahead for their weekly grocery runs, deliberately, with a shopping list that often sums up to over $100. Consumers typically do NOT plan ahead for their future lunches and dinners, deliberately, with a list of restaurant menu items that they plan to order for each individual future meal. Nor do typical consumers order over $100 worth of grocery items on a whim. Thus Instacart’s long-time association with large-AOV grocery delivery orders. Therefore also comes DoorDash’s brand image challenge, which seems to be deep, ingrained, and hard to get rid of.

That is why I say, going forward, DoorDash’s own brand could be a limiting factor for DoorDash’s grocery delivery business in terms of capturing large-AOV orders — i.e., Instacart’s stronghold.

Long-Term Profitability Could Be Lower Than Expected: DoorDash’s long-term profitability could be lower than expected, which, I worry, could disappoint eager investors with high hopes. The issue here is rooted in the physical world that we live in. Just like when you are trying to reduce the friction of something, the maximum you can reduce it to is zero. Similarly, there is likely a physical limit as to how much DoorDash can still improve its physical operations — which, in turn, will constrain DoorDash’s profitability potential.

Let’s think through some numbers (and if not otherwise defined, all figures are measured in Adjusted EBITDA as a % of GOV). Broadly speaking, there are two categories that DoorDash has been working to improve and that are both subject to the kind of physical limit of “cannot go lower than zero.” One, “refunds, credits, and promotions.” As of 2019, these three items amounted to ~4.5% of GOV (source: IPO Prospectus). Among DoorDash’s 14 quarterly earnings press releases since its IPO in 2020, the company highlighted its improvements in “refunds, credits, and promotions” in at least six of the 14 releases.

According to my modeling, today, “refunds, credits, and promotions” is probably under 2% of GOV. So, from this point onward, the maximum DoorDash can still improve in this category is 200 bps. But, 200 bps still looks unrealistically optimistic, as one can safely assume that almost all consumer businesses incur refunds, credits, and promotions. Perhaps, I guess, the maximum future improvement in this area is 50-100 bps.

The second category is “delivery cost per order.” Based on DoorDash’s official disclosure and some additional calculations that I made, I triangulated that number to be 14%–15% (full-year 2019) and 11%–12% (today). How much can DoorDash still improve from here? As a reference point, China’s food delivery giant Meituan is regarded as one of the best operators in the space and for Meituan, its “delivery cost per order” is 14%–15%. One can argue that the U.S. has a tipping culture that can help further reduce delivery cost. But, at the same time, sensible observers will come to agree that if the labor pay rate (i.e., platform pays, before tips) becomes exceedingly low, there is a point that workers will simply refuse to take the job.

In addition, there are signs that DoorDash might have already reached a plateau in improving its “delivery cost per order.” In DoorDash’s 2024 Q1 earnings press release, although the management team mentioned “logistics efficiency,” they attributed “net revenue margin” improvement primarily to the company’s advertising business. As a comparison, in at least 10 of the prior 13 earnings press releases, the management team mentioned “logistics efficiency” as one of the drivers for improving net revenue margin.

DoorDash has already materially reduced its operating costs to 2.5% (sales and marketing) and 2.0% (research and development, and general and administrative) — back in 2019, the two numbers were 7.2% and 3.4%. Combined with the physical constraints that I mentioned above, that is why I am concerned that DoorDash might be running out of room to improve its margin profile and DoorDash’s long-term profitability could come out to be lower than some observers have hoped for earlier on.

All in all, I remain bullish about DoorDash, primarily for its strong fundamentals and high certainty. Its heightened stock valuation, which I pointed out in my prior piece (link), appears to have been partially alleviated by the meaningful drawdown in the stock price over the past two months.

Disclaimer: Jackson Zhu (the “Author”), individually or through one or more entities controlled by him, holds long positions in the securities of and derivatives associated with DOORDASH, INC. (the “Company”) described herein and stands to benefit from an increase in the price of the common stock of the Company. Following the publication of this post, the Author intends to continue transacting in the Company’s securities, and may become long, short, or neutral on the Company’s securities. As such, the Author may change his view on the analysis presented as of any date following the date of initial publication. Likewise, the discussion contained here is not designed to be applicable to the specific circumstances of any particular reader, and you should consult with your own advisers to determine if any investment ideas discussed here are appropriate for your circumstances. The Author has obtained all information herein from sources believed to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind, whether express or implied. The Author makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice, and the Author will not undertake to update this publication or any information contained herein. Please read our full disclaimer at “jacksonzhu.com/about/.”