By David Trainer, Kyle Guske II, and Matt Shuler
Is it a coincidence that DoorDash filed for its IPO so soon after vaccines for COVID-19 were announced? We think DoorDash’s current investors and bankers recognize that the window of opportunity to IPO this terrible business closes quickly when the threat of COVID-driven lockdowns no longer drives growth in food delivery demand.
With the latest S-1 filed, DoorDash /zigman2/quotes/222973991/composite DASH -5.36% is aiming for a price range of $75-$85, which could give the firm a valuation of $23.8 billion to $27.0 billion ($25.4 billion midpoint). Such a valuation would be well above the firm’s last private valuation of $16 billion.
At a valuation of $25.4 billion, DoorDash (whose ticker will be “DASH” when it begins trading) earns our unattractive rating and would be the most ridiculous IPO of 2020. We think this proposed public equity offering holds no value — $0 — beyond bailing out private investors before unsuspecting public investors realize the business is not viable in its current form.
This IPO reminds us of WeWork’s attempted IPO, which we called the most ridiculous IPO of 2019, because DoorDash’s business is similarly disadvantaged.
The fact that this company made it to the pre-IPO stage reflects the overblown fervor of the work-from-home theme. It is not a good idea to invest in businesses that have:
2.No profits in the best possible environment
3.Competition that can offer the same service for free.
Worse yet, to justify a $25 billion valuation, the company needs to grow its share of global food delivery app market to 56% from about 16% over the trailing 12 months (TTM) while also raising margins from -12% to 8% in an intensely competitive business.
Throw in the auditor’s reports of weak internal controls, and investors could be holding stock in a business that might not be around in a few years.
We think the only chance for investors in this IPO to see any gain comes from a greater fool willing to pay a higher price for no economically justifiable reason. For that matter, the stupid money risk of a company overpaying for the stock to ride the work-from-home fad or follow Uber’s /zigman2/quotes/211348248/composite UBER -4.56% Uber Eats strategy is real.
Nevertheless, the ceiling for the price rational investors could pay for DoorDash is $1.4 billion, which equals about $2.5 billion in capital the company has raised to date less the $1.1 billion in cash on its books. Why should anyone pay more than the costs to build the business, especially when it hasn’t come close to generating consistent profits and may never?
It took a global pandemic to drive the firm’s one quarter (ended June 30, 2020) of GAAP profitability. The firm has not been profitable since, and we think it may never be.
The only firms with worse TTM net operating profit after-tax (NOPAT) margins than DoorDash’s are Uber and Lyft /zigman2/quotes/208999293/composite LYFT -5.45% . If DoorDash can’t do better than a -12% margin in this environment, perhaps the best possible environment for food delivery, then when will it ever be consistently profitable?
Figure 1 compares TTM margins for United Parcel Service /zigman2/quotes/201245396/composite UPS -1.60% and FedEx /zigman2/quotes/203047719/composite FDX -2.25% as well as Pizza Hut’s parent company YUM! Brands /zigman2/quotes/209029767/composite YUM +0.02% , Domino’s Pizza /zigman2/quotes/201587798/composite DPZ -7.02% and Papa John’s International /zigman2/quotes/207343722/composite PZZA -11.58% .
Sources: New Constructs, LLC and company filings *DoorDash’s TTM NOPAT margin is estimated assuming the firm’s NOPAT improved at the same rate as the firm’s income from operations from 2019 to the TTM period. We make this assumption as there is not enough information in the S-1 to definitively calculate NOPAT over the TTM period.