DoorDash IPO: Trouble Brewing for Food Delivery Companies?

DoorDash, the biggest US food delivery company, just filed IPO paperwork which revealed strong revenue growth and an unexpected quarterly profit — the first in its history.

On the IPO prospectus filed this Friday, the startup reported revenue of $1.92 billion from January to September, three times higher than in the same period last year, and a $23 million profit in the second quarter of 2020.

The seven-year-old company is benefiting from the high demand for food delivery during the pandemic, but it advised in the filing that it may not be able to continue growing at the same rate.

DoorDash also warned about intense competition. Its main rivals are Uber Eats, GrubHub, and Postmates. 

But there is a new competitor on the scene, as Lyft announced in its earnings call earlier this week that it too would be instituting food delivery to better compete with its primary rival, Uber.

DoorDash has an advantage over those two competitors in that, like GrubHub and Postmates, it was born to deliver food from restaurants. But it started to diversify this year by creating partnerships with grocery stores. This creates competition with firms like Instacart.

The Great Contractor Concern

Another risk highlighted by the company in the filing is the legal challenges regarding how it classifies Dashers — the name it calls the independent contractors that make the deliveries. 

Like Uber and Lyft, the company considers them contractors, but in some states’ laws are requiring them to be considered employees.

During the election, California voters struck a major victory for these companies by weighing in on Proposition 22, a ballot measure to decide if companies like Uber and Lyft should classify drivers as contractors, not employees. 

The measure passed, exempting the companies from a California labor law, known as AB5, which was approved in September 2019. About 58% of voters supported the passage of Prop 22.

Reclassifying the employees would have been a massive hit for the ride-sharing and delivery companies’ business model. 

“If Dashers are reclassified as employees under federal or state law, our business, financial condition, and results of operations would be adversely affected,” DoorDash said in the paperwork. 

DoorDash’s Prospects

According to the paperwork, it has more than 18 million consumers and 1 million Dashers.

Its market share in the US has grown from 17% in January 2018 to 50% in October this year, including the acquisition of the premium restaurant delivery Caviar in August 2019.

DoorDash’s IPO has been considered one of the hottest market debuts of the year.

Founded in 2013 by a group of Stanford students, the company was valued by private investors in June at around $16 billion.

DoorDash will be listed on NYSE under the symbol DASH.

DoorDash is part of a long-awaited list of IPOs that are still supposed to happen this year. The other biggest names on the list are AirBNB and the online discount retailer Wish.

The Big Question

The big question looming over DoorDash, Lyft, UberEats, and other food delivery companies is clear: can they continue to thrive with so much competition? Particularly as we draw closer to the end of the pandemic and see a consequential reduction in the demand for food delivery? 

The answer remains to be seen, but investors are right to be nervous about what the end of the pandemic means for the stock market. 

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