A Massive Week for IPOs

This week will be a big win for the IPO market. Over a dozen IPOs are expected, one of which is food-delivery company DoorDash. 

DoorDash will go public on Wednesday, December 9 on the NYSE under the ticker symbol “DASH.” It set its IPO price range at $90–95 per share, a boost from its original range. Usually, when there’s an increase in a price target, that means there is demand for shares and high investor interest.

According to data from Bloomberg, IPOs on U.S. exchanges have already raised a record $256 billion this year. DoorDash is seeking to raise $3.1 billion from its public debut, which would make it one of the biggest U.S. technology IPOs of the year. However, experts are cautioning interested investors against this IPO. David Trainer, CEO of the research firm New Constructs, critiqued DoorDash’s IPO, saying:

This IPO reminds us of WeWork’s attempted IPO, which we called “The Most Ridiculous IPO of 2019,” because DoorDash’s businesses is similarly disadvantaged… To justify a $25 billion valuation, the company needs to grow its share of global food delivery app market to 56% from ~16% over the trailing twelve months (TTM) while also raising margins from -12% to 8% in an intensely competitive business.

It was only a few months ago that the company reported its last private valuation ($16 billion), and it now expects to almost double that with its public debut.

The problem is DoorDash hasn’t been profitable. This year’s second quarter was the first time it had been profitable since its founding, but that quickly diminished as the company reported losses in the third quarter. Unfortunately, that trend of unprofitability will likely continue.

The only reason DoorDash was profitable in the second quarter is COVID-19 pandemic lockdowns. Once those stay-at-home orders began to lift, food-delivery orders most likely slowed down. We know that people won’t be stuck in their homes forever and won’t be dependent on food-delivery apps like DoorDash. The COVID-19 pandemic will pass. Perhaps a few people will continue ordering from DoorDash but not in the record numbers it saw earlier this year. Once people are able to dine indoors at their favorite restaurants and aren’t afraid of the inconvenience of running to the grocery store for a few items, DoorDash will become a second or third thought.

For DoorDash to really be worth an almost $30 billion valuation, it should have more of a global presence. Right now, it has around ~16% of the global food delivery app market over the trailing twelve months (TTM). The company needs a much higher percentage to be worth the valuation it’s indicating. Over the past month, officials are getting plans in place to distribute COVID-19 vaccines. Once the public gets the vaccines, there won’t be the driving force behind DoorDash’s business. It’ll need to figure something out to keep its revenues up. Even the company recognizes its inability to retain customers. Its IPO paperwork revealed:

Within our industry, the cost to switch between offerings is low. Consumers have a propensity to shift to the lowest-cost provider and could use more than one local logistics platform, independent contractors who provide delivery services could use multiple platforms concurrently as they attempt to maximize earnings, and merchants could prefer to use the local logistics platform that offers the lowest commission rates and adopt more than one platform to maximize their volume of orders.

Having this type of business model makes it difficult to make a profit. Investors don’t want to be part of a company that doesn’t make a profit and, therefore, doesn’t have a future. A lot is up in the air when it comes to DoorDash’s public debut. The company has received a lot of attention because of its brand and its popularity in its market, but that isn’t enough to survive on, and it won’t be enough to keep investors invested.

Until next time,