DoorDash (DASH) intends to raise $2.64 billion from the sale of its Class A common stock in an IPO, according to an amended registration statement.

San Francisco, California-based DoorDash was founded to enable local retailers to provide delivery capabilities via the firm's mobile app and logistics platform.

Management is headed by co-founder and CEO Tony Xu, who was previously Vice President of Finance at Uber Technologies.

Below is a brief overview video of the DoorDash IPO by TheStreet:

Source: TheStreet

The firm counts over 390,000 merchants, 1 million 'Dasher' delivery persons and over 18 million users.

DoorDash has received at least $2.26 billion from investors including SVF Fast, Sequoia Capital and Greenview Investment Pte.

The company obtains new users via online marketing and word of mouth.

It acquires new merchants via online marketing, inside sales and direct sales efforts depending on the size of the merchant network.

Sales and Marketing expenses as a percentage of total revenue have been uneven but dropping in the most recent reporting period as revenues have increased sharply.

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, more than doubled to 2.2x in the most recent reporting period.

According to a 2019 market research report by QSR Magazine, restaurant digital orders have been growing at an annual rate of 23% from 2013 to 2019 and were forecast to increase by three times by the end of 2020.

However, that estimate was before the onset of the Covid-19 pandemic, which has greatly accelerated the use of these delivery services, increasing adoption and growth as a consequence.

Third party apps such as DoorDash, GrubHub and UberEats account for 40% of the top 20 most popular apps.

However, a significant challenge for these apps is turning trial users into repeat users. This is typically done through ongoing promotions, which can be expensive and also serve to train users to expect a deal in return for app usage.

Major competitive or other industry participants include:

  • GrubHub (GRUB)
  • UberEats (UBER)
  • Postmates (POSTM)
  • Amazon (AMZN)
  • Google (GOOG)
  • In-house restaurant delivery services

DoorDash’s recent financial results can be summarized as follows:

  • Sharp topline revenue growth
  • Strong increase in gross profit, but reduced gross margin
  • Reduced operating losses and lowered negative operating margin
  • A sharp swing to positive cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

doordashpl

Source: Company registration statement

As of September 30, 2020, DoorDash had $1.1 billion in cash and $1.4 billion in total liabilities.

Free cash flow during the twelve months ended September 30, 2020, was negative ($574 million).

DASH intends to sell 33 million shares of Class A common stock at a midpoint price of $80.00 per share for gross proceeds of approximately $2.64 billion, not including the sale of customary underwriter options.

Class A stockholders will be entitled to one vote per share.

Class B shareholders, which include the senior management of the company, will be entitled to 20 votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $27.3 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 10.39%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

We intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. Additionally, we may use a portion of the net proceeds we receive from this offering to acquire or invest in businesses, products, services, or technologies. However, we do not have agreements or commitments for any material acquisitions or investments at this time.

We may use a portion of the net proceeds we receive from this offering to fund a $200 million pledge, as part of our Main Street Strong program, to support merchants, Dashers, and local communities.

We may also use a portion of the net proceeds we receive from this offering to satisfy a portion of our anticipated tax withholding and remittance obligations related to the vesting and settlement of RSUs that we have granted. The RSUs that we have granted to date generally vest upon the satisfaction of both service-based and liquidity event-related performance vesting conditions occurring before the award’s expiration date.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are Goldman Sachs, J.P. Morgan, Barclays, Deutsche Bank Securities, RBC Capital Markets, UBS Investment Bank, Mizuho Securities, JMP Securities, Needham & Company, Oppenheimer & Co., Piper Sandler and William Blair.

Commentary

DoorDash is seeking to go public after a Covid-19 pandemic-induced sharp increase in demand for its delivery services.

DoorDash’ financials show extremely strong topline revenue growth and gross profit growth, but reduced gross margin percentage.

Operating losses were reduced, but are still high. Cash flow from operations swung strongly into positive territory.

Sales and marketing expenses as a percentage of total revenue dropped in the most recent period, while its Sales and Marketing efficiency rate climbed markedly.

The market opportunity for delivery services received a significant boost as a result of the Covid-19 pandemic and its changes on consumer behavior.

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 78.8% since their IPO. This is a top-tier performance for all major underwriters during the period.

As a comparable-based valuation, DASH management is asking IPO investors to pay a 3x multiple premium over competitor GrubHub.

DASH has shown much stronger topline revenue growth than GRUB, so that would explain part of the premium, but not all.

A major question is how durable these revenue gains will be for services like DoorDash, once the pandemic’s effects recede, likely beginning in the second half of 2021.

Also, another question is once the pandemic recedes, how much more expensive will it be to obtain each new additional customer and to persuade that customer to continue using the service after the initial promotions end?

Services like DoorDash rely on significant promotional cost reductions to acquire and keep customers using their system, so these costs are major inputs into the future potential profitability or lack thereof, once the extraordinary circumstances of the Covid-19 pandemic are ameliorated.

DoorDash has done well to focus its efforts on suburban markets as opposed to high density urban markets. This strategy will be rewarded if large numbers of people leave the dense cities for the suburbs, which appears to be happening.

DoorDash’ most recent private valuation was $16 billion, in a June 2020 financing, so management is asking public investors to pay a sharply higher valuation.

I believe the IPO is highly valued and essentially priced for perfection. I suspect the stock will trade at or above its proposed price for some time post-IPO but will likely drop over time as the ‘hot money’ leaves the stock.

My opinion on the IPO is NEUTRAL due to excessive valuation, but for investors who like the company’s approach, I suggest watchlisting the stock for a potentially lower entry point in 2021.

NEUTRAL

Expected IPO Pricing Date: December 8, 2020.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice. Past performance is no guarantee of future results.)

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