ITT: people claiming DoorDash has no path to profitability - the numbers in the S-1 tell a different story. On page 112, there's a chart of how much profit they make per order based on how long the user has been on the platform. In the first year, the value is negative because DoorDash spends money on sales and marketing to acquire the customer. By the third year, DoorDash is making a consistent profit of 8% on each order placed.
When you look at the numbers in aggregate, it appears they are massively unprofitable. When you look at the numbers by cohort, it's clear they are investing money in sales and marketing and based on their metrics, they will generate a significant return on their investment over the next few years. Over time, as a larger and larger percentage of their users become recurring users, their profit on each order will approach 8%.
That graph is only as good as the "contribution profit" metric, which is basically a thing made up by DoorDash to make the financials look better. It is not "profitable" in any standard metric.
Look at how many things are excluded in contribution profits:
"We define Contribution Profit (Loss) as our gross profit (loss) less sales and marketing expense plus (i) depreciation and amortization expense related to cost of revenue, (ii) stock-based compensation expense included in cost of revenue and sales and marketing expenses, and (iii) allocated overhead included in cost of revenue and sales and marketing expenses. "
So basically if you don't count any indirect COGS, you don't count the RSUs you're paying the engineers and you don't count the capitalized costs of your infrastructure, you can eek out an operating profit. In my view, that's not a "profit."
Haven't read the S-1, and won't be investing, but I can give you another way of looking at it.
You do an IPO to scale. Once you scale, the relative costs of systems and engineering 'disappears'.
In terms of profitability. Everyone is used to success stories of 50% margin. That's not the norm though. In retail 8% is not bad. Especially since you're hoping to get 8% of a huge market.
If they had an 8% margin, or expected to have one soon, it would be a great business. But you only get to those numbers using their non-GAAP metrics. None of that really matters/is surprising though, obviously investors know this but speculate that future growth and the changing market will one day result in real margins. Food delivery has been profitable on a small scale since forever, it definitely seems plausible that you could do it on a large scale and makes loads of money.
Excluding stock-based compensation is pretty nuts IMO, RSUs are recognized and taxed as ordinary income because they're ordinary income. Apparently "Contribution Profit" is roughly defined as "ramen profitability."
"Well you see, if you only count about 1/3 of the compensation we pay engineers, ignore bonuses, etc, we've got us a great business!"
As an investor, I worry about churn. Year 2...N customers are more profitable. Great. But what happens when <New Startup X> throws billions into blitzscaling their new delivery app? There goes your most profitable cohort, to the next (temporarily cheaper) delivery platform. And food delivery apps aren't a classically 'sticky' business: it's centered on ephemeral transactions.
And you're right to be. Every consumer cohort has first year drop out. Like Universities, like festival goers, like any iterated system it shows a Pareto distribution.
Don't you think it depends on the existing players' cash horde after an IPO? I am very interested to hear a successful VC's response to "I want to go against Uber, DD, and GrubHub. Money plz!"
There's far too much cash sloshing around, lots of malinvestment since too many dollars are looking for returns.
You worry about the entrepreneur who asks the Venture Capitalist, and their MO is 'take on <DoorDash/etc>'. Instead of worrying about our hypothetical entrepreneur with a lousy funding rationale, I worry about the structure of the market proving it's 100% inevitable someone will try and undercut them, by virtue of the magnitude of malinvestment present today.
The numbers you describe are an opportunity but also a big risk. The problem with these app-based businesses is that there’s little brand loyalty. They spend a ton of money to create a market and customer base and round about the time they start making money a copycat comes along and customers flip. It becomes a race to the bottom. Few would dispute the profit that could come from holding onto a user for years. Many will dispute the likelihood that this will actually happen.
I think the bigger question for this type of company is margins in the face of competition. The service they offer is totally undifferentiated from that which a competitor could fairly easily provide. Yes, it takes marketing dollars to sensitize consumers to the existence of delivery services. But, once someone knows about them, there may well be a race to the bottom on price. An 8% profit sounds great, but is it sustainable?
I suspect that the massively negative first year margins due to, what I assume is CAC, creates a moat. Very few companies are as "backed by Masayoshi Son," i.e. willing to set fire to the huge quantities of money necessary to establish a foothold. This is a network effect business in a lot of ways, and metros tend to be dominated by a particular food delivery provider.
The problem with CAC in this market is that I doubt enough people say, "I'm hungry, I'll open door dash". Instead I want to eat from a local restaurant whom I call for delivery and then door dash pays someone to bring my food. In that case DD hasn't "acquired" me as a customer.
Yep... I use whatever one offers me the best deal. These days, I rather order it from the restaurant directly if they have curb side pick up. It's better for them and me. Delivery drivers often get lost or are incredibly late.
This is not an unreasonable argument but you're negating the company and the industry ability to innovate and find new rev models. I use to frequently see this argument made about Apple and Amazon before Apple's transition to "services" and AWS. When you buy a tech stock you're not betting on a robot that can't adapt, you're betting on a corporate culture that's digging up new ground.
The question, then, is whether DoorDash is more like Amazon or WeWork.
By everything I see, they are a company that pays people to deliver stuff. That is a very crowded marketplace. Without groundbreaking innovation the likes of which companies an order of magnitude bigger have failed to deliver (like Uber and self-driving cars), I personally don't see how they create a revenue stream as lucrative as AWS.
When you look at the numbers in aggregate, it appears they are massively unprofitable. When you look at the numbers by cohort, it's clear they are investing money in sales and marketing and based on their metrics, they will generate a significant return on their investment over the next few years. Over time, as a larger and larger percentage of their users become recurring users, their profit on each order will approach 8%.