DoorDash, Inc. (NASDAQ:DASH), the online food delivery leader's stock price has already climbed 128% in the past year to $138, and even though I'm late in buying it, DoorDash has a huge moat of a virtuous network in a duopoly, with the largest reach and market share in the US market. I still believe that the stock can easily grow from here on sustained revenue growth, improving margins and adjusted earnings and cash flow growth.
The Bull Case
Significant competitive advantages from a duopoly
The US online food delivery market has become a duopoly between DoorDash and Uber Eats (UBER) with 65% and 23% each, with Grubhub, owned by Just Eat Takeaway (OTCPK:JTKWY) a distant third at 9%. DoorDash has grown organically and through acquisitions like Volt, which it acquired in 2022, as did Uber Eats with its acquisition of Postmates in 2020.
Barriers to entry
The biggest competitive advantage for DoorDash is the barrier to new entrants created by the sheer amount of scale that DoorDash and Uber have achieved in this industry. The $10.8Bn of Capex plus the $7.9Bn R&D spent in the last 5 years in setting up its platform makes it difficult to near impossible for smaller entrants to enter the market and do it economically at scale. The take rate or the net revenue margin is just 13%, and unless you're a large competitor willing to spend an enormous amount of money and time to invest in the business as DoorDash has done, building up the platform, active users and customer base of restaurants and chains, you won't be able to grab a meaningful foothold in this industry and would suffer cash burn for a long time trying to dislodge the incumbents. Cumulatively, DoorDash has spent over $40Bn in the last three years on R&D, sales and marketing, and direct costs on their marketplaces and platform services, to improve quality, and generate efficiencies through scale. The humongous expense to get the market leadership and reach has now created a strong barrier to entry.
Virtuous Network
This is a virtuous network, the mom-and-pop restaurants or the big chains want the DoorDash's delivery service, not just for the delivery logistics, they need the platform's reach for the customers. In turn, the customers use the app not just for delivery, they use it for the widest number of restaurants or cuisines. I like this business because this is a solid moat for the incumbents, and it looks extremely unlikely to be dislodged. Worldwide, DoorDash had 550,000 restaurants and 37Mn users in 2023, while Uber Eats had 890,000 restaurants and 88Mn users.
The flywheel and sheer stickiness of its network make it a sizable moat.
Pricing Power
Pricing power is a big strength of duopolies. As I showed in the table below for the operating metrics, DoorDash has improved its take rate or net revenue margin from 11.7% to 12.9% in the last two years. It would be economically disastrous for a new entrant to come in below these take rates; I believe DoorDash would be able to maintain prices at both the restaurant and user end. The strength of these take rates gives them operating leverage, which shows up in their bottom line, which in turn throws up even more cash. While DoorDash grew revenue by 31% its Adjusted EBITDA grew a huge 230%, similarly, Uber with only 12% growth in its Uber Eats segment grew EBITDA by a humongous 173%.
DoorDash and Uber Eats EBITDA
DoorDash and Uber Eats (DoorDash, Uber, Seeking Alpha, Fountainhead)
Market Growth
Another strength is the growth of the market, the worldwide online food delivery market is expected to grow at a CAGR of 10% for the next 5 years, and clearly DoorDash has done far better with a CAGR of 97% since 2019, and a forecasted revenue CAGR of 20% for the next four years.
DoorDash is already in 27 countries after its acquisition of the Helsinki based Volt, which should help it continue to grow in the European market.
Expanding verticals
DoorDash already has 150,000 non-restaurant accounts and has been making a very big push in groceries, staples and liquor, as evidenced by its partnerships with Albertsons, CVS and Best Buy to name a few. Last quarter 20% of their users ordered non-restaurant delivery for the first time.
The worldwide grocery delivery market is also expected to grow 13% from 2024 to 2028, even faster than the restaurant delivery market's 10%, ensuring that DoorDash has a large and expanding market to exploit.
Strong Operating and Financial Metrics
DoorDash's operating metrics and financials paint an appetizing picture from the table below and show a company that is improving margins and generating cash.
DoorDash Key Operating Metrics
DoorDash Key Operating Metrics (DoorDash, Seeking Alpha, Fountainhead)
Order growth remained strong in 2023 at 24%, just a shade under 2022, a sedate but still strong pace compared to the pandemic stay at home growth of 70%, which fueled the rise of online delivery.
Marketplace GOV growth was also good in 2023 at 25% but is expected to grow slower at a mid-point of 14%, reflecting a maturing market; however DoorDash management has guided to 18% revenue growth, suggesting a better increase in revenue per order, and with a better take rate. The take rate (The Net Revenue Margin) has been steadily increasing from 11.7% in 2021, to 12.3% and 12.9% in 2023. The order ticket size has also grown steadily from $30.17 to $30.90 per order. Better metrics like these flow directly to the bottom line even with slower total order volume, and we can see it in two metrics - contribution profit growth, which grew at 58%, from 46% in the prior year and the contributing profit margin, which has now swelled to 3.7% from just 2.6% in 2021.