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Breakingviews - DoorDash is a dish that gets hotter with time

A rider for "Grubhub" food delivery service rides a bicycle during a delivery in midtown Manhattan following the outbreak of the coronavirus disease (COVID-19) in New York City, New York, U.S., July 9, 2020. REUTERS/Mike Segar

NEW YORK (Reuters Breakingviews) - By filing for an initial public offering, DoorDash boss Tony Xu clearly hopes to capitalize on the growth of food delivery during Covid-19. It’s hard to blame him: the company’s revenue has more than tripled over the past six months. While the IPO comes with some obvious risks, the pandemic has turned DoorDash, and its likely valuation, from lukewarm to hot.

The SoftBank-backed company has most of the typical ingredients of a Silicon Valley startup, including scorching sales, a dominant market position, and entrenched founders. Millions of cooped-up American households have sent the company on a tear. From March until the end of September, revenue topped $1.6 billion, compared with $454 million a year earlier. It’s not profitable – which is sadly the norm among technology IPOs – but on its own adjusted measure of EBITDA, the company swung into the black during the first nine months of 2020.

Investors probably worry less about profit than they do market share. DoorDash has staked out 50% of the U.S. delivery market, well above Uber Technologies and Grubhub, according to Edison Trends. Yet even that generous share amounts to just 6% of America’s population, the company claims in its filing.

This year’s growth means DoorDash’s most recent fundraising valuation of $16 billion looks almost modest. Annualize its revenue for the first three quarters, and this year could bring in roughly $2.5 billion. On a valuation of seven times – more than Just Eat Takeaway.com but less than China’s Meituan, the debt-free DoorDash would be worth about $18 billion. Of course, that assumes investors aren’t turned off by the fact that Xu and his co-founders hold stock with 20 times the votes of the company’s regular shares. Xu can also effectively vote on behalf of his co-founders, in a setup similar to the one enjoyed by Facebook’s Mark Zuckerberg.

A bigger risk is that once the pandemic subsides, so might sales. And competition won’t let up. Uber is banking on food delivery as a counterweight to its ride-hailing service. Grubhub’s planned merger with European counterpart Just Eat will give it more financial firepower. Lyft is mulling entering the space as well. And drivers and restaurants will always be pushing for a bigger slice of the profit. Even if a valuation of around $18 billion looks feasible, Xu might want to leave something on the table.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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