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DoorDash: The Most Ridiculous IPO of 2020 : New Constructs CEO

David Trainer, New Constructs CEO joins the Yahoo Finance Live panel to discuss what to expect from the Doordash IPO.

Video Transcript

- And Emily, let's dig a little bit more into that big question mark there, because obviously when we're talking about valuation here, where it goes from here as we return to normal is a big question mark. Our next guest, before we saw this trading range expected, back when we were still talking about $75 to $85, the expectations for DoorDash shares just a couple of weeks ago, he called it the most ridiculous IPO of 2020, no doubt in his mind probably getting a little bit more ridiculous. Let's bring in David Trainer, the CEO of New Constructs here alongside Yahoo Finance's Dan Roberts to further the discussion.

And David, I mean, if you thought it was going to be ridiculous back when we were thinking about that valuation, here at this price range you're looking at DoorDash getting valued closer to $80 billion, quite the jump from that $16 billion valuation in the private markets back in June. So how do you justify a valuation that high? Talk to me about the fundamentals here.

DAVID TRAINER: You don't, from a fundamental perspective. As I mentioned previously, this IPO reminds us of the last IPO we called the most ridiculous, and that was We Work, and it didn't happen. The DoorDash business is similarly disadvantaged. They do not have a way, I think, to make money long term. There's a lot of competition. We're seeing more customers switch away from DoorDash as their market share kind of declines, and at the end of the game, end of the day, this business is a race to a zero margin business, because there's really no differentiation.

The huge spike in valuation, I think this is a capital markets trick. This is Silicon Valley selling public markets an asset at a huge premium, and they're going to laugh all the way to the bank, and I think a lot of individual investors rushing into this are going to lose a lot of money. And it's really too bad.

- David, it's interesting to see how some of the competitors are trading today, and looking at Grubhub up 9%. We're also seeing Uber up as well. The point you made here about competition is certainly one that DoorDash has highlighted in their own filing, talking about there is not as much loyalty in the food delivery space. So certainly there are concerns about not having a moat.

But I wonder if there's a case to be made that even in a potential consolidation that happens in the space, DoorDash is better positioned for that, largely because they have been able to focus on the suburbs and smaller cities and have been able to gain bigger market share as a result of the strategy they have taken.

DAVID TRAINER: I would say that's a good point if there were some advantage to scale here. Right, I mean, for every delivery system that they may buy, how hard is it for another one to start up? You know, and let's-- the real, I think, the monster in the room here is restaurants. Why do they want to give up the direct relationship with the consumer? When you send your food off to someone you don't know, is not part of your business, that's a real problem.

I mean, look at outlet, factory outlet stores as a big competitive threat to malls, right? The owner of the product wants to maintain a relationship with the buyer, and just to assume that restaurants are going to give all this business away, they're not going to do that for very long. They're certainly not going to do it at a price that makes DoorDash a lot of money, because they can make that money themselves. They've got no reason to give those profits away.

So if there were some advantage to scale here, then maybe you could make a case for consolidation. But look, in a world where another food delivery startup could start tomorrow, you know, there are no advantages to scale. There are very limited barriers to entry, as evidenced by the number of firms rushing into the space.

This is really, I think the history books are going to look back and make a case study out of a hyped market, a business that couldn't make money in the best possible lockdown environment, not going to make money in the future, yet selling for, you know, double its original IPO price. I mean, this reminds me of the IPO tech bubble when I was back on Wall Street, where companies sold for ridiculous values when they were worth nothing. You know, look, this stuff happens in the short term, and investors should steer away.

Wait until the IPO lockup. Wait to see if these original investors are still going to hold the stock before you buy it. Otherwise, why should you buy it at such a premium? Why are the private market guys going to sell it to you if they think it's so valuable? It's because they want out. They want out before it goes from where they had it on their books at $16 billion bucks to probably something way less than that, just like we saw with We Work. Right? WeWork was going to price at $40 billion bucks. Two weeks after that IPO gets canceled, SoftBank remarks the asset on their books down to $4 billion. So look, this stuff happens. Wall Street tries to sell people on stuff that they shouldn't buy. Buyers need to beware.

DAN ROBERTS: David, Dan Roberts here. Let's talk specifically about the pandemic effect on DoorDash. You know, you mentioned in a note that you think it's no accident the company is trying to rush its IPO out right before vaccines starts getting distributed, and we've talked a lot during the pandemic about the pull forward in demand, companies that benefited from people staying at home, and now the expectations for their business have been raised.

I guess what I'd ask you is, you know, you're one of the people saying you're bearish on DoorDash's growth path after the pandemic is over. But even before the pandemic, you know, DoorDash was a big name that was seeing growth. It isn't as though people have just started doing at home food delivery during the pandemic. So you know, how much of the success do you ascribe to the pandemic effect, and do you really think that the minute the pandemic is over, the growth stops for DoorDash, Uber Eats, and those names?

DAVID TRAINER: Yeah. Look, you're right. The fundamentals don't look good now. I don't think they look better later. And really, at the end of the day, what we like to do is understand what the valuation implies about the future profitability of the business. Like what kind of numbers do you have to put in your model to justify a, let's say, $200 share price, right?

And we just updated our model for the new numbers, and basically what the $200 per share implies the company will do in the future is improve their margins to 8% compared to negative 12% now. So they're going to go from a negative 12% to a positive 8% margin, while also growing revenue at 40% compounded annually for over a decade.

So that's super high growth and a huge improvement in margins, two things which almost never happen simultaneously. And at the end of the day, the market prices imply that they're going to have 138%, 138% of the global food delivery app market. So they're going to be bigger than the entire market. That's how ridiculous this valuation was.

When we started this-- when we started this work, this analysis, right, we were looking at around 50%, 60% market share, which is still ridiculous. Now we're talking about 138%. This makes no sense when you look at the numbers. It makes all the sense in the world when you look at what Silicon Valley is trying to sell to individual investors, because they make a lot of money on it. And again, it's up to the individuals. Buyer beware.

- No, I think you're making good points here, and obviously before we got to this level here, I was excited to have a conversation. We were talking about the IPO price at $102, because it can kind of be teased out and you can walk through these models a little bit more seriously. But I think the writing is kind of already on the wall. If you look back at Grubhub and kind of what happened there, because that's where DoorDash took the share away, at least here in the US, and you know, Grubhub had been pretty open about the idea that DoorDash could continue to burn through capital here as a privately held company backed by SoftBank.

And to your point here, I mean, through the listing they're raising $3 billion again here to kind of I guess continue the growth story around the globe, but if there's a limited upside in terms of how much opportunity still exists there to justify this price that we're talking about, it does seem hard to kind of have that discussion.

But on the idea of them using the proceeds here to continue building it out, I mean, what does that look like to you I guess in the short term to see a return when we talk about profitability immediately, and what that opportunity looks like as they grow even further past those easy wins?

DAVID TRAINER: Look, there's no doubt that being able to raise a lot of capital is a competitive advantage to companies in a money losing business. We've seen this with Uber and Lyft. We saw what happened after those IPOs. And I talked to some of the bankers on some of those deals. And at the end of the day, I said, what is their competitive advantage? They said, well, they can raise more money than other firms. Well that just means they can burn more cash. And when that money runs out and they can no longer price below cost, guess what happens? Competition comes in, and the market becomes rational and they don't make money.

Grubhub is a great example, right? They had something like 55% market share before DoorDash got in, and that immediately dropped very quickly. They had a high margin. And as market share came in, it went from 10%, their margin from 10% to minus 5%. You know look, I mean, investors are basically giving management a right to go burn cash. That, in my opinion, is like never a good idea for an investment.

Why invest in a company that's going to grow market share and not be profitable? And when they run out of that money, they're still not going to be profitable. They're just not going to be able to charge prices below cost, and that means their market share will go way down. So it's all just kind of a, you know, a shell game. You know, hey, we're going to get market share, but we're not going to make money. And when we run out of money we're not going have market share anymore. We've seen the story before with Grubhub. I mean, trust me, I would love to find a way to be positive about this. You know, we can find a way for investors to believe in Airbnb's valuation. I mean, they have a real business. But Dash, in our opinion, does not have a real business.

- And David, I'm glad you mentioned Airbnb. Let's end on that. We've been talking about DoorDash, which is hitting the market today. Tomorrow we've got the Airbnb IPO, another name that the pandemic has had a real effect on, although interestingly, it really bounced back, and it was thanks to a shift in the types of bookings that the company was seeing, people starting in July really continued to book Airbnb's, but they booked them closer to home, drivable, and for longer stays thanks to work from anywhere, this new remote work normal. But after the pandemic, are you as bullish on Airbnb's growth?

DAVID TRAINER: You know, I wouldn't say I'm bullish about Airbnb. I think it's an expensive valuation. I would advise investors to wait until after the IPO lockup is done before they jump in there as well. But I will tell you the IPO and the valuation is nowhere near as ridiculous for Airbnb as it is for Dash. I mean, the implied market share for Airbnb is just like 4%, right, as opposed to 138%.

And we think look, this is a business that's got, you know, it's got some real merit. Right, I mean, this is like a hotel without having to invest in all the capital to build a hotel. And so that's a cool concept. And I think that the fact that they figured out a way to do well in an adverse environment, whereas DoorDash has not really figured out a way yet to really make money in a positive environment, we're talking about two different stories, Dr. Jekyll and Mr. Hyde in a lot of ways.

Yeah, Airbnb. It's a real business. The valuation is not ridiculous. And so it's still expensive, right? I mean, you know, bankers make more money on IPOs and they make on anything else. Wall Street makes more money in IPOs than anything else. So it should be no surprise that they're trying to cash in as much as they can while they can. And that's all the more reason why investors always need to be wary of IPOs. I think something like two thirds of them over the history of the world have not been successful in terms of made IPO investors money. So Airbnb is more reasonable than Dash.

- Well, we'll see how reasonable it becomes tomorrow if it follows in this kind of run up ahead of the first trade here. But David Trainer, New Construct CEO, appreciate you coming on here to give us that sense of reality.