DASH | LONG | THE TAIL IS LONG

We are going into this LONG with a clear understanding that DASH is optimizing for scale and not profitability. However, there is a clear case to be made that DASH can rise from an upstart restaurant ordering/delivery company into an empire spanning Restaurants, Convenience, Grocery, and other CPG categories; much like AMZN moved from an online bookseller into an empire spanning retail, media, cloud computing, logistics, and much more.  Future growth will come from the advantages the company has moving from the restaurant category to realizing the synergies and efficiencies of batching orders in adjacent categories.  Together these are going to be big businesses within DoorDash, making the stock a long-term LONG.

We were initially SHORT DASH on the anticipated shift in consumer behavior as states continue to reopen and the impact of stimulus wears off.  Additionally, we were entering the seasonally slower summer months for restaurant delivery than the colder winter months.  The company has been upfront about this reality, saying, "We expect the combination of summer seasonality, market reopenings, and the waning impact of stimulus to result in some impact to our business in the near term."

This slowdown over the next 3-4 months is transitory, and I believe that the changing consumer behavior in a post-pandemic era suggests less of a short case and more reason to be LONG than we saw at the beginning of the year.  We believe that the company can easily exceed $70 billion in Marketplace GOV in FY2024, up over 80% from $37B in FY 2021.  These estimates assume no incremental international GOV, except the current markets the company operates in.  Capturing this potential, any short-term downdraft will be temporary. 

KEY POINTS

Growing Categories and GMV – Unless you are part of the growing intermittent fasting crowd, we eat three meals a day.  More, importantly we do more than that in a day, like a drink, snack, and have many other basic needs.  We drink coffee in the morning and alcohol at night while managing a household with children and pets too!  In 1Q21, DASH saw strong growth in the number of consumers who place their first order on DoorDash in new categories, but restaurants are the more significant driver of orders.  Importantly, consumers who place their first order in a new category demonstrate higher average 3-month order rates than those who place their first order with a restaurant.  It confirms that offering increased selection across multiple categories improves the consumer value proposition and makes DASH an essential brand for on-demand local commerce. This long-term shift will be driving higher GMV over time, and it will be a critical driver of stock price performance.  

Monetizing DashPass (Prime 2.0 or SBUX Rewards?)  In1Q21, less than 10% of monthly active users placed an order in a new category.  We believe that DashPass will be a critical driver for more consumers to find value in ordering beyond restaurants, suggesting increased awareness, including driving increased categories/offerings and drive incremental order volume from a large and growing consumer base.  DashPass is a $10 subscription (for orders more than $12) service that subverts the cost of multiple delivery fees on multiple orders.  The value proposition of DashPass has translated into a DashPass membership base that has grown by 2x since its introduction.  As of May 2021, there were over 5 million subscribers, but this was the same number in the S1.  You can equate this loyalty to AMZN Prime or even SBUX rewards, which drive significant repeat orders.  The strategy will be to add vertices into DashPass to improve the value perception to drive more GMV.

Is an Advertising model on the horizon?  A critical element to the future of DASH revenues and profitability will be to have an advertising strategy.  The accelerated adoption of digital retail in 2020 has put the advertising market in flux, with the most prominent digital advertising firms are seeing record business in 2021.  This shift has upended traditional patterns of brand discovery, transaction, loyalty, and competition. This poses an existential challenge for traditional brands that have historically gone to market through brick-and-mortar retailers; they are feverishly working on upgrading their digital strategy, capabilities, and capacity. At the same time, so much product discovery has migrated from Google and Facebook to the extensive digital retailers. Notably, the largest restaurant companies are scrambling to figure out marketplace selling and retail media.  Many of these companies are unprepared for a future where the product ranking algorithms of Amazon, Instacart, Walmart, and Target are the primary gateways to their consumers. DASH is the primary gateway to the restaurant consumer, and they will likely capture significant market share in the digital advertising space. 

The backbone is the biggest concern.  The biggest concern over being LONG is the companies delivery infrastructure. How Dashers are paid is the most prominent issue the company faces, and there is a risk that regulatory changes making them employees may affect the companies profitability. This will become a more significant issue as the company grows internationally, where the rules vary by country. The company touts the economic benefit to Dashers "Q1, over 2 million Dashers earned well over $2.5 billion. Dasher earnings per active hour increased in Q1 on both a Q/Q and Y/Y basis. Over the last two years, efficiency improvements have allowed us to increase Dasher earnings per active hour by over 40% while reducing average consumer fees per order by 13%. Stronger-than-expected consumer demand, along with extreme weather events and the impact of stimulus checks, resulted in a meaningful undersupply of Dashers in the latter part of Q1. Stimulus checks created a particularly acute challenge, as we believe they drove a short-term increase in consumer demand and a simultaneous decrease in Dasher hours." The lack of supply of labor is also an issue to monitor.

More to come next week.