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America’s most dominant food delivery firm, DoorDash Inc, completed their IPO yesterday, raising $3.4 billion. Delivery revenues have surged in 2020 as the onset of the COVID-19 pandemic shuttered indoor dining at restaurants across the country. While the sector still struggles to pull profits out of notoriously thin food service margins, DoorDash has managed to break away from the pack by adding subscription plans and focusing on suburban markets with larger volumes of family-sized orders. Still, the company undoubtedly faces headwinds, now trading at 17x revenue and facing competition from the likes of Uber Eats.

Related Stocks: DoorDash Inc (DASH), Uber Technologies, Inc. (UBER), Grubhub Inc. (GRUB), Just Eat N.V. (TKAYF), Lyft, Inc. (LYFT)

In the latest blockbuster IPO of 2020, DoorDash soared. Under the ticker DASH, the stock began trading at $182 per share, which valued the food delivery company at $41 billion, and closed at $189.51 after being initially priced at $102 per share on Tuesday night.

Like the rest of the industry’s major players, DoorDash has benefited from an increase in ordering from home during the coronavirus pandemic. Combined, the four leading companies in the industry (DoorDash, Uber, Grubhub, and Postmates) raked in roughly $5.5 billion in revenue from April through September, more than twice as much as their combined $2.5 billion in revenue during the same period last year.

DoorDash has set itself apart by focusing on an expansion into the suburbs as its rivals were focused on big cities. The food delivery market has largely been divided up on a geographic level – one individual service tends to monopolize local markets. As we noted last July, maps from the Wall Street Journal show that Postmates dominates a number of key neighborhoods in Los Angeles (a city where Uber Eats was noticeably lacking a serious presence). Postmates is also noticeably powerful throughout New York City, with its main competitor being Grubhub.  Though Brooklyn is a Postmates stronghold, its northern neighbor, Queens, is solid Grubhub turf.

DoorDash, by contrast, focused on low-competition suburban markets with higher volumes of family-sized orders. DA Davidson analyst Tom White told Quartz that DoorDash’s share in suburban markets is estimated at 58%, up from 23% in January 2018. It also gave priority to expanding the number of restaurants on its app, while Uber Technologies Inc.’s Eats focused on restaurants with fast delivery.

DoorDash’s subscribers have more than tripled to more than 5 million in September, up from 1.5 million in January. The Wall Street Journal reports that they’ve also managed to succeed at retaining customers, since 86% of its orders came from existing customers in the three months ended September 30.

All told, DoorDash reported $1.9 billion in revenue in the first 3 quarters of 2020. That’s up from $587 million during the same period last year. As its revenue grew, DoorDash also narrowed its net loss to $149 million over the same period in 2020. In 2019, DoorDash had a net loss of $533 million over the nine-month period.

Additionally, the company did manage to record a $23 million profit in the second quarter of this year. CNBC reports that the company is now making money on every order, showing a path to bottom line profitability. Though a road to profits presents huge potential, the current valuation is undoubtedly extended. DoorDash is now valued at 17 times revenue, assuming you take the last quarter and extend it over a year. By the same metric, Uber is valued at less than 8 times revenue, and GrubHub agreed to be acquired earlier this year for under 4 times sales.

Profitability is as good as the holy grail to the major food delivery firms who make the bulk of their revenue through commission fees, charging restaurants anywhere from 15% to 30% on every order they fulfill to pay for connecting them with hungry customers. That cut is pretty steep, but not actually very lucrative when one considers the notoriously thin margins in the restaurant industry. Many believe the only path toward significant profits is a drastic drawdown on the fixed costs involved in the ride-share/delivery business.

As Forbes points out, venture capitalists and other investors continue to put capital into these money-losing businesses because they foresee a longer-term change in the environment…

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