DoorDash Got a Big Pandemic Lift. Can It Deliver Again?

(Bloomberg) -- DoorDash picked a good time to file its initial public offering prospectus: Its finances are looking pretty rosy right now.

According to the document, made public on Friday, the food delivery company’s revenue more than tripled in the first nine months of this year compared to the year before, buoyed by Americans using the app to order dinner while sheltering in place. It has a growing cohort of users as part of its loyalty program, DashPass. And it even turned a quarterly profit for the first time ever—during the three months right at the beginning of the pandemic.

As public investors weigh whether to buy another big-spending, high-growth, high-valuation startup, they’re likely wondering: Will it last?

“This peak is already subsiding a little bit,” said Tri Tran, the co-founder and former chief executive officer of Munchery, a food delivery company that shuttered in 2019, who now works as a principal at advisory firm Applico. “I expect this to subside — perhaps still growing, but it won't be so crazy a bump as it's been in the past six to nine months.”

DoorDash, like its peers in ride-hailing and food delivery, has almost always been unprofitable. It lost more than $100 million a quarter in 2019 before eking out a $23 million profit in the second quarter of this year, then going back to losing money in the three-month period after that. The startup has raised gobs of cash from venture capitalists and SoftBank Group Corp. with the aim of growing big enough to dominate a market first and break even later.

While the coronavirus pandemic has decimated the economy and put millions out of work, it proved to be a huge boon to DoorDash. After lockdowns began, the San Francisco-based company started seeing more orders, more customers, more restaurants on its app and “improved efficiency” of its service, according to the filing. But even the company says the bump won’t last forever: “The circumstances that have accelerated the growth of our business stemming from the effects of the Covid-19 pandemic may not continue in the future,” the filing said, predicting lower growth rates in revenue, total orders and total order value in coming periods. 

A DoorDash spokesperson declined to comment, citing regulatory disclosure rules ahead of the IPO.

DoorDash’s filing does point to some reasons to be optimistic about its ability to turn a profit post-pandemic. If the company keeps its new customers returning, they tend to spend more year after year on the platform. And existing customers don’t require as much sales and marketing as new ones do. Customers who first ordered in 2018 spent on average 65% more in 2019 than they did in their first year, according to the filing. 

But it’s also unclear how much potentially fickle customers will stick around without enticement. The company’s revenue grew from $675 million in the second quarter to $879 million in the next, but it also spent $290 million on sales and marketing in the third quarter to keep those sales growing, nearly 75% more than the year before. In its risk factors, DoorDash explains how every part of its platform is threatened by price sensitivity. Customers, delivery workers and restaurant owners could all shift their loyalty to a competing food delivery platform if it offers them a better deal.

As long as it faces healthy competition, DoorDash will be forced to compete on price, Tran said. DoorDash said in the filing that it now has half of U.S. food delivery share, with Uber Eats at 26% and Grubhub at 16%. (Postmates, which Uber acquired this year, holds 7%.)

In the similarly cutthroat ride-hailing industry, the two biggest players, Uber Technologies Inc. and Lyft Inc., long fought price wars with each other that made it impossible for them to turn a profit. It wasn't until they both went public that they agreed to call a sort of ceasefire on excessive spending, which could help each company achieve its goal of turning an adjusted profit next year. 

Tran believes the same price competition will dog DoorDash until there’s more consolidation in the industry. “I very firmly believe three [companies] is too much,” he said. “It’s going to come down to two. The nature of marketplaces is there’s a No. 1 and a No. 2 player, and third place is the loser.”

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