2023-08-14 15:51:51 ET
Summary
- DoorDash reported impressive Q2 2023 earnings with growth in marketplace GOV, orders, revenue, and EBITDA margin.
- The market's negative reaction to the earnings seems disconnected from the company's strong operating and financial momentum.
- DoorDash's expansion into grocery and other verticals, as well as its competitive advantages in logistics speed, customer acquisition, and delivery costs position it for long-term growth.
Q2 Earnings Takeaways
After DoorDash ( DASH ) reported Q2 2023 earnings on August 2nd, the stock has fallen 15% since then. However, the earnings results demonstrated impressive growth:
- Marketplace GOV and orders grew 26% and 25% respectively
- Revenue was up 33%
- EBITDA margin continued increasing
- TTM cash flow rose 466% year-over-year and 52% quarter-over-quarter
- Financial outlook raised, with Marketplace GOV and adj. EBITDA guidance is up 1% and 16%
Financials and operating metrics (DASH) Free cash flow (DASH)
Since the Fed began rate hikes in mid-2022, DoorDash has consistently delivered high revenue growth above 30%. This highlights robust execution by management amid macro uncertainty.
The market's negative reaction seems questionable given the exceptional operating and financial momentum shown this quarter. DoorDash continues to rapidly gain share in a large addressable market. We believe the sell-off is disconnected from fundamentals and presents a buying opportunity. The business remains very well-positioned for sustainable long-term growth.
Revisiting Comparable Valuations
Our original Strong Buy thesis highlighted DoorDash's $231 billion addressable food delivery market, similar in size to Uber's ( UBER ) $253 billion rideshare market. Yet DoorDash traded at a lower valuation for two main reasons:
- Rideshare has a higher take rate than delivery. Uber's Q2 2023 rideshare take rate was 30%, versus 19.6% for Uber Eats food delivery.
- Uber Eats' take rate exceeds DoorDash's. DoorDash's Q2 take rate was 13%, lower than Uber Eats' 19.6%.
DoorDash's take rate (DASH)
Combining the facts above, this helped explain why Uber's market cap is 3X higher than DoorDash as Uber's ridesharing business has around 2.3X take rate of DoorDash's food delivery.
Growth Prioritization Impacts Take Rates
We believe DoorDash is prioritizing growth overtake rate increase by expanding into grocery and other verticals.
Uber Eats has more international presence, so its global delivery bookings exceeded DoorDash's US-centric business until 2023. In Q2 2023, DoorDash's strategy drove strong outperformance - its gross bookings grew 26% year-over-year to $16.4 billion, while Uber Delivery bookings were $15.9 billion, up just 14%.
DoorDash is leveraging its US scale advantage to rapidly gain share. Once it reaches sufficient dominance, it can optimize take rates.
As the US market leader, we think DoorDash should theoretically maintain at least parity with Uber Eats' take rate. We see the runway for take rates to rise to at least match Uber Eats' 19.6% rate, representing a ~7% upside for DoorDash.
For now, robust growth in a huge addressable market justifies a premium valuation despite the lower near-term take rate. DoorDash has room to run before take rates must catch up to deliver target returns.
Massive TAM Expansion
DoorDash is expanding into the US grocery market, a $947 billion market dwarfing the restaurant market.
According to Oberlo, the US online grocery market is set to surpass $160 billion in 2023, with a 14.8% yearly increase. This trend is expected to continue, reaching over $235 billion by 2026, driven by growing online grocery shopping and rising food prices.
Online grocery penetration (eMarketer)
Beyond grocery, DoorDash is expanding into broader retail delivery, partnering with major chains like Dick's (DKS), Office Depot, PetSmart, and Sephora. This foray into general merchandise delivery opens up DoorDash's total addressable market dramatically. According to Statista, total US retail sales top $ 7.1 trillion - nearly 30x the size of the food delivery market. While early stage, DoorDash's push into non-food categories provides tremendous potential to extend its platform into a much larger TAM.
Competitive Advantage
As DoorDash expands into grocery and retail delivery, it faces established competitors like Walmart ( WMT ), Amazon ( AMZN ), and Instacart. But despite being a late entrant, DoorDash is rapidly gaining share - evidence it possesses an important competitive advantage.
Online grocery market share (Sacra.com)
We believe DoorDash's edge lies in its superior logistics speed enabled by its technology and delivery infrastructure.
DoorDash's Speed Edge
Walmart and Amazon boast advantages in scale and supply chain integration, giving them lower COGS. However, DoorDash's speed edge helps offset some of those weaknesses in grocery delivery over Walmart and Amazon.
Delivery time (Sacra.com)
DoorDash customers tend to spend more than Amazon customers on average. In 2022, DoorDash had $53.4 billion in total bookings and 32 million monthly active users, which equates to $1,668 in bookings per customer. In comparison, Amazon had $219 billion in total online sales and 197 million active users, equaling $1,111 in sales per active customer. This indicates DoorDash is generating over 50% more spending per customer than Amazon. This indicates DoorDash has room to effectively compete with Amazon on promotional initiatives. This also allows DoorDash to leverage speed to gain grocery share among affluent consumers who value convenience over cost.
Fleet and Food Delivery Frequency
DoorDash's fleet exceeds 2 million, dwarfing Amazon's 275k drivers. Due to its extensive fleet network, DoorDash has an edge in terms of delivery costs.
In addition, more frequent food ordering enables DoorDash to maintain a vast delivery network. Surveys show ~ 60% order food delivery weekly versus 41 % for e-commerce. This provides DoorDash with lower customer acquisition costs than online retailers. DoorDash's advertising spend is just 1.8% of bookings versus 10 % for Amazon.
Walmart and Amazon possess COGS advantages, but DoorDash's higher customer spending, lower traffic acquisition costs, and delivery costs help counter the weakness.
Instacart:
While Instacart is currently the leading competitor in grocery delivery, DoorDash has key advantages that reduce the threat Instacart poses. Instacart's lack of control over grocery inventory means it does not have a COGS advantage compared to DoorDash. Additionally, DoorDash maintains a larger delivery fleet and customer base through its high-frequency food delivery service - 2 million drivers versus Instacart's 600k , and 32 million monthly active users versus Instacart's 10 million. Hence, DoorDash has the edge in speed, delivery cost, and customer network effects. If Instacart were to continue operating under its existing model and maintain its independent operations, we do not anticipate Instacart becoming a significant long-term threat to DoorDash. However, there is some risk if Instacart were acquired by Amazon or another grocery retailer. Other than that, we see, overall, DoorDash is well-positioned competitively versus Instacart in grocery delivery.
Valuation
DoorDash is leveraging its large delivery fleet and speed advantage to expand into grocery and goods delivery. However, the market caps of Amazon, Walmart, and CVS are currently 46x, 14x, and 3x greater than DoorDash. We believe there is significant upside potential for the stock as DoorDash discloses penetration stats in grocery and goods delivery.
Furthermore, while Uber has a higher take rate in ridesharing, that market is almost certainly smaller than grocery and goods delivery. DoorDash also has the ability to increase take rates over time. DoorDash's P/S and forward P/E ratios are only slightly higher than Uber's. Its P/Cash flow is lower than Uber's. Considering these factors, DoorDash's valuation looks attractive compared to Uber. The market appears to be ignoring DoorDash's potential to grab shares in massive markets like grocery and goods delivery. As DoorDash reveals more traction in these areas, we expect a pronounced upside for the stock.
Risk
Competition risk outside food delivery
We view large retailers with existing inventory like Walmart and Amazon as a potential threat to DoorDash in grocery and goods delivery, as they have cost of goods sold (COGS) advantages over DoorDash. Amazon in particular, with its focus on convenience, has significant overlap with DoorDash's offering. Walmart and Amazon also benefit from greater scale which helps build a competitive moat against DoorDash's COGS advantage. There are also risks that these large retailers may acquire on-demand delivery companies like GrubHub or Instacart to directly take on DoorDash. However, as we suggested earlier, DoorDash likely maintains advantages in customer acquisition and delivery costs due to its position as the most frequently used app and largest delivery fleet. Considering DoorDash is the $30 billion leader in food delivery with a huge addressable market upside in grocery and goods, the risk-reward trade-off still seems relatively favorable.
Conclusion
We believe the recent stock pullback provides an opportunity to invest in the stock as the company is exhibiting robust growth in a vast opportunity while beginning to showcase operating leverage capabilities.
DoorDash's dominance in food delivery provides a foundation to expand into massive grocery and retail delivery markets. Its food delivery leadership allows DoorDash to maintain strong demand density, fueling advantages in customer acquisition costs and delivery speed versus e-commerce giants.
With strong cash flow generation capabilities, we believe DoorDash can continue to grow amid this high-rate environment. Executing this balancing act will put DoorDash in a class above as both a top-line growth story and maturing business model in our view.
DoorDash's huge addressable opportunity, competitive differentiators, and execution excellence underpin our Strong Buy rating.
For further details see:
DoorDash Continues To Dash Swiftly