U.S. Food Delivery App Giant DoorDash Files For IPO
DoorDash, the SoftBank-backed U.S. food delivery app which leads the market in North America, has filed for an IPO. Amid the drama of the coronavirus-inspired stock market collapse this week, the announcement has created less noise than it would ordinarily have been expected to.
When the IPO goes ahead is also likely to be influenced by market conditions and DoorDash will presumably wait for current volatility levels to stabilise before testing investor sentiment for another high growth, loss-making, SoftBank-funded tech start-up. The summer months, ahead of election season in the U.S. is currently being suggested as the most likely point the large IPO could go ahead.
DoorDash’s announcement suggests that the company will favour a traditional IPO rather than following the route of a ‘direct listing’, recently chosen by other tech start-ups Slack and Spotify. In a direct listing, investors do not commit to buying shares at a fixed price ahead of their free float on the stock exchange. Instead, the issuer simply releases share onto the market and lets the market decide their price. The company commented:
“The number of shares to be offered and the price range for the proposed offering have not yet been determined.”
DoorDash is growing quickly with market research and data firm Second Measure estimating the company’s January sales as up 89% year-on-year. Last July a major delivery deal was agreed with McDonald’s, which had previously worked exclusively with rival Uber Eats. The food delivery market has grown by an overall 26% over the last twelve months.
However, despite the impressive growth rates, the food delivery sector is proving difficult to turn a profit in due to low margins and cut-throat levels of competition. In the USA, DoorDash competes with Uber Eats, GrubHub and Postmates, as well as a clutch of smaller players on a more local level.
Grubhub went public as far back as 2014 but has seen its share price struggle since a sharp fall during the autumn 2018 correction, which particularly hurt tech stocks. While many rebounded to new heights from early 2019, Grubhub has continued to languish. Postmates announced last February that it had filed for IPO but has since repeatedly pushed the date back after other ‘gig economy’ IPOs such as those of Uber and Lyft struggled and dampened investor appetite.
Another issue facing the sector are new rules being introduced to change the employment status of gig economy workers. For example, California is trying to pass the ‘Assembly Bill 5’, that would force companies such as DoorDash and Uber to provide their workers with employment benefits. DoorDash is, along with Uber, Lyft and other big name ‘gig economy’ operators, part of a coalition that are jointly investing $90 million to lobby against the bill.
Many analysts believe the food delivery app market will have to move into a period of consolidation if the leaders are to turn growth rates and market share into profit. With both DoorDash and Uber Eats counting SoftBank as their largest investor, there has been speculation that a merger, which has been actively encouraged by SoftBank, could be on the cards as well as an IPO.
Youssef Squali of U.S. bank SunTrust commented for the Financial Times:
“DoorDash is going to have a lot of work to do in this competitive landscape. I suspect it is pursuing a potential business combination, as they should, because ultimately I’d be very surprised if this market can support more than two or three large players at scale.”
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