DoorDash's food deliveries earned it a $13 billion valuation, but experts say its IPO plans amid market turmoil and a virus outbreak are a recipe for disaster (GRUB)

DoorDash CEO Tony Xu speaks onstage during Day 1 of TechCrunch Disrupt SF 2018 at Moscone Center on September 5, 2018 in San Francisco, California.

DoorDash, which this week confidentially filed its public-offering paperwork, could face a poor reception from Wall Street, business experts told Business Insider.
Many of the other jumbo-sized, money losing startups like DoorDash that have gone public recently have seen their stocks perform poorly, and WeWork wasn't even able to complete its IPO, they noted.
Door Dash's chief public competitors are struggling with losses and its closest analog, GrubHub, has a market capitalization that's about one-third of its valuation.
Meanwhile, Coronavirus-related turmoil in the stock markets and the potential for an economic downturn could further dampen interest in DoorDash's shares.
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DoorDash isn't WeWork or Uber. But it shouldn't expect a much better reception from Wall Street than those companies received, business experts warn.

Indeed, the failure of WeWork's attempted initial public offering last year and the poor performance of the stocks of Uber and many other money-losing, jumbo-sized startups that recently went public is likely to seriously subdue investors' appetite for DoorDash shares in its own prospective IPO, they say. Even if that weren't the case, the current market turmoil in reaction to the impact of a possible pandemic from the novel coronavirus would likely put the damper on demand for stock in the food delivery service, they say.

"Now is a tricky time for anybody to be considering an IPO just based on what's going on," said David Schonthal, clinical associate professor of innovation and entrepreneurship at Northwestern University's Kellogg School of Management. He continued: "I imagine there's plenty of investors that are a little spooked."

Earlier this week, DoorDash indicated that it plans to move ahead with a long-rumored IPO, announcing that it had confidentially filed its paperwork with the Securities and Exchange Commission. Because it filed its documents in a non-public fashion, it did not disclose any of its finances, such as its revenue, losses, or cash on hand. It also has not yet said when it plans to go public, how many shares it will sell, or the price it which it expects to sell them.

A DoorDash representative did not respond to an email seeking comment on the timing of the filing.

But if history is any guide, the company could face "a very tough tough road ahead" Schonthal said.

The public markets haven't been kind to unicorns lately

For the last year, the public markets haven't been particularly accommodating to so-called unicorns, venture-backed startups with valuations of $1 billion or more. Uber, the biggest of the bunch, debuted with a market capitalization far below what had been bandied about mere months before. Its stock promptly sold off, falling below its last private valuation. It has largely traded below its IPO price ever since.

Lyft, Uber's archrival, had a similar experience. Peloton, Slack, and Pinterest have also struggled to stay above their IPO prices.

GrubHub CEO Matt Maloney But things have been even worse for some of the more recent unicorn IPOs. WeWork wasn't even able to complete its offering even after offering to slash its previous $47 billion valuation to $12 billion, a cut of nearly 75%. It ended up withdrawing its offering and had to be bailed out by SoftBank at an even lower valuation of $8 billion to avoid going bankrupt.

Casper, an online mattress vendor, had only a slightly better time of it than WeWork when it went public last month. It actually did hit the market. But it had to accept an initial public valuation of $490 million — less than half the $1.1 billion value private investors had placed on it just a year earlier. And its stock price has dropped even from that level since it debuted; its market capitalization is now just $358 million.

What all of those companies have in common is that they've been posting big losses despite, in many cases, being in business for many years. While public investors in the past have been willing to put up with such losses for the promise of strong revenue growth, that's no longer the case, the experts said.

"Investors' philosophies on growth-at-all cost versus profitability have changed significantly in the last year," Schonthal said. "Now," he continued, "in order to prove to the market that you're an investable business, you have to be able to show a path to profitability."

DoorDash is in a tough business

It could be hard for DoorDash, which is also a member of the unicorn club with a $13 billion valuation at the time of its last funding round last year, to do that or to convince investors that its prospects are brighter than those of its peers that hit the market before it. Like those companies, the San Francisco-based startup is reportedly losing lots of money. It was on track to lose $450 million on a $1 billion in sales last year, according to a report in The Information. But even that amount likely understates the size of its red ink, because it leaves out things like depreciation and amortization of capital expenditures.

Potentially worse for DoorDash is that two of its chief competitors are also losing significant amounts of money. Uber Eats, the food delivery arm of the app-based taxi company, lost $1.4 billion last year — again leaving out a whole host of expenses — on $2.5 billion in sales.

Dara Khosrowshahi 2012 Meanwhile, GrubHub saw its bottom line swing from a $78 million profit in 2018 to an $18.5 million loss in 2019 after it embraced a business model much like DoorDash's in order to better compete. Previously, GrubHub had largely served as an intermediator between customers and restaurant partners, helping to direct delivery orders to establishments that already had delivery drivers of their own. Now, emulating DoorDash, it's bulking up its own delivery service and offering food from restaurants with which it has no formal relationship, dramatically increasing its costs.

"It's hard to see how a business like this will convince investors and retail investors that they've figured it out when other businesses of similar DNA have struggled to find the answer that leads to a profitable business model," Schonthal said.

A related problem for DoorDash is that its closest analog among public companies — GrubHub — has a market capitalization of just $4.4 billion, or about one-third DoorDash's valuation in its last venture round. This despite the fact that GrubHub likely posted slightly higher revenue — $1.3 billion — last year and a far smaller loss. GrubHub is trading at around a 1.5 price-to-sale multiple. By contrast, DoorDash is at around 13.

"It's like a broken record ... with these new IPOs coming out," said Dan Morgan, a senior portfolio manager at Synovus Trust and a longtime tech investor. "We're up against the same challenges," he continued. "You've got a company coming public that has a multiple that is excessive ... comparing it to its most like publicly traded company, which is GrubHub, and then it's not profitable."

A recession wouldn't help

The public markets have been working their way through the unicorn struggles and likely would have reached some kind of equilibrium on their valuations, said Robert Hendershott, an associate finance professor at Santa Clara University's Leavey School of Business. But the coronavirus outbreak has now disrupted that process.

SUN VALLEY, ID - JULY 12: Tim Cook, chief executive officer of Apple, attends the annual Allen & Company Sun Valley Conference, July 12, 2019 in Sun Valley, Idaho. Every July, some of the world's most wealthy and powerful businesspeople from the media, finance, and technology spheres converge at the Sun Valley Resort for the exclusive weeklong conference. The financial markets are in turmoil, with the major US indices in correction territory. And with supply chains disrupted by the outbreak and companies including Apple and Microsoft warning of revenue shortfalls, there's growing concern of an impending economic downturn.

"It just keeps getting worse, like all the signals are more discouraging," Hendershott said.

The risk of a recession is much higher today than it was even six weeks ago, he said. That alone is likely to tamp down investor demand for shares in DoorDash or other possible unicorn IPOs. On top of that, though, a recession will likely derail attempts by DoorDash and its money-losing peers to reach profitability even as investors are focusing more and more on startups' bottom line.

Such plans for profitability are "going to be out the window," Hendershott said.

Yet, despite all this — the bad economic environment, the poor reception for previous unicorn IPOs, its large losses, and its struggles of its chief rivals — DoorDash likely still can go public, he said. It just shouldn't expect to be valued at anywhere close to $13 billion, he said. Instead, Hendershott said, DoorDash might have to settle for something closer to what it private investors said it was worth in 2018 — somewhere between $1 billion and $4 billion.

"I suspect that DoorDash can go public," he said. "It's just a question of what price they're willing to accept."

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