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DoorDash soars in public debut

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Yahoo Finance’s Alexis Christoforous and Asad Hussain, PitchBook Mobility Analyst, discuss DoorDash’s IPO.

Video Transcript

ALEXIS CHRISTOFOROUS: Let's get to one of the stocks that investors are dashing towards today, and that is DoorDash. Priced its initial public offering at $102 a share. That was above an already increased price range of $90 to $95. So it looks like the underwriters weren't aggressive enough because DoorDash opened for trading at $182 a share. It's just slightly off that right now, still, though, up 75% from its IPO price, giving the food delivery company-- are you ready for this-- a valuation of $69 billion.

Here to talk about it is PitchBook Mobility analyst, Asad Hussain. Asad, good to have you with us. I know that you believe the stars have aligned for DoorDash's IPO. Why was now the right time for this company to go public?

ASAD HUSSAIN: Yeah, thanks for having me. I think, frankly, DoorDash could not have picked a better time to go public. It's a combination of things. On the one hand, the company has seen a huge, persistent surge in demand for food delivery brought about by the pandemic. That's been kind of the key feature everyone has been focusing on.

But, at the same time, you've seen other things going on behind the scenes that really paved the way for success for the company, including consolidation in the space with Caviar, Postmates, and Grubhub all being acquired, lending a degree of certainty with regards to the market becoming more rational with pricing and maybe assuaging investor fears that we could see a race to the bottom in terms of pricing like we saw with ride-sharing a few years ago.

And then, also, a major overhang in investor minds has been this issue of labor regulation, especially, with regards to the gig economy. And, with the passing of Prop 22 in California, I think that overhang has dissipated to some extent. So you combine all of those things together, but, also, what we're seeing, which is a sort of shift in investor mentality in terms of looking at these mobility and transportation technology companies.

There's a lot more excitement in this space, and we're seeing that with the debut of these electric vehicle companies going to market through SPACs, the run-ups we're seeing with public EV companies like Tesla and NIO, and, also, with last-mile delivery with companies like DoorDash and Instacart going to market at these really high valuations. I think you put all these factors together. It's a recipe for success.

ALEXIS CHRISTOFOROUS: Let's take a step back, though. I mean, you laid out sort of the bullish case for DoorDash, but, you know, their margins are razor thin, as is the case for all of these food delivery companies. You've also got the fact that they're charging restaurants exorbitant fees, sometimes, 30% of the cost of an order. And a lot of restaurants, especially small and midsize restaurants, are saying that's just simply unfair. When you look at that and, again, those razor thin margins, is DoorDash really worth $69 billion?

ASAD HUSSAIN: Yeah, it's an important risk. I think the bigger risk, as far as whether it's worth $69 billion, has more to do with the growth story. And that ties in with margins because I think, right now, the company is rightly prioritizing growth over margins. The reasons their margins are so low are because they're investing so much in marketing and expanding into new markets and really getting the growth rate as high as they can. And that's what's allowed them to outcompete competitors, such as Uber Eats, both on the growth front, but, also, on the margin front.

So I think, when you look at it from that perspective, they've shown really good progress on the margin front, and they're really knocking right on the door to profitability. They weren't profitable last quarter, but they were in Q2. So I think investors, overall, are pretty comfortable with the pathway to profitability being there. And I think the bigger question, in terms of whether the valuation is justified, is whether they can maintain the growth rate, especially, as things go back to normal.

ALEXIS CHRISTOFOROUS: Yeah, that's a great point because I believe, even in their S-1 filing, they admitted, look, we're not going to be able to have this torrid pace of growth post the pandemic because not as many people are going to want to be delivering and taking out. So, when you bake that into the pie, what's your outlook for DoorDash in 2021?

ASAD HUSSAIN: Yeah, we're definitely expecting their growth rate to decelerate, but, at the same time, I think what's giving investors confidence in the business is that these sort of restaurant delivery services are still relatively under penetrated. And there's a good runway of growth ahead of them. And, when you layer on potential international expansion and expansion into things like grocery delivery, convenience item delivery, I think there's a lot to like about the business.

And what we're excited about, in particular, is the investments that DoorDash is making in terms of setting itself up for that next stage of growth, leveraging its logistics network for these other types of delivery, but, also, investing in things like creating partnerships with self-driving companies like GM Cruise and acquiring startups like Scotty Labs and, also, investing in things like ghost kitchens.

ALEXIS CHRISTOFOROUS: So, when you look at the whole space, which is a crowded space, this food delivery area, do you believe that DoorDash is best positioned right now for sort of the challenges to come post the pandemic?

ASAD HUSSAIN: We think they're really well positioned. When you look at the investments they've made and how they've run the business, it's been really smart. They've been able to deliver industry-leading revenue growth and industry-leading profit margins, partially, compared to companies like Uber Eats, for example, and part of that has been driven by their focus on targeting really higher-ticket markets, higher-margin markets, like suburban areas. And so we think, moves like that, as well as the sort of strategic moves that I mentioned and alluded to earlier, that's going to be all key to their growth story going forward.

ALEXIS CHRISTOFOROUS: All right, we're going to be watching. Incredible, though, IPO for DoorDash today. Asad Hussain, analyst at PitchBook Mobility, thanks so much.

ASAD HUSSAIN: Thanks for having me.