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DoorDash shareholders aren’t convinced the company can take on Amazon
Following Instacart acquisition plans and an Amazon deal with rival Uber Eats, DoorDash stock is on sale.
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DoorDash is suddenly competing with Amazon on multiple fronts. Investors shouldn’t dismiss its chances.
Late last month, DoorDash announced a deal to buy Instacart for $17 billion, valuing the grocery delivery platform at a 26% premium to pre-deal rumor prices. The combined company would have a 19% market share in U.S. online grocery sales, according to data from Emarketer. Amazon and Walmart, the two largest, hold 40% and 27% shares, respectively.
DoorDash’s shares had dipped following news of a rumored deal, but rallied in the days following the deal announcement. Then on Thursday, news of an Amazon-Uber Eats partnership sent DoorDash shares plunging 9.4%. Its shares barely moved on Friday. Under the Amazon partnership, Amazon Prime members get free Uber Eats restaurant delivery on orders above $25. After the selloff, DoorDash shares are 3% below where they were trading before word of the Instacart deal first started getting out.
This past week’s selloff appears overdone. After all, Uber Eats would only be replacing Amazon’s previous delivery partner Grubhub, whose market share didn’t get a boost from the partnership. A partnership involving grocery would have been more interesting, but Amazon itself is competing for third-party grocery delivery and has been expanding its partnerships with supermarket chains such as Winn-Dixie.
The big question now is whether the combined DoorDash-Instacart can effectively compete with Amazon and Walmart on grocery delivery. The market for grocery delivery is still relatively untapped, with e-commerce expected to account for 15.5% of grocery sales this year, according to Emarketer. Even a slice of the $1.4 trillion-plus physical grocery market would be a huge growth opportunity.
DoorDash Chief Executive Tony Xu said in a call discussing the Instacart deal with analysts that grocery delivery is “just a fraction of what its potential could be” because consumers are “still being asked to pay a premium for imperfect delivery.”
As Xu sees it, the key to accurate grocery delivery is through direct inventory management. DoorDash has been delivering through its own dark stores—known as DashMarts—since 2020, and opened these up as a fulfillment service to retailers last year. Deliveries fulfilled through the DashMarts are at near 100% accuracy, while those fulfilled through third-party stores are delivered with an accuracy rate in the low-90s, Xu said.
DoorDash clearly sees the physical fulfillment network as important to its strategy. In its latest press release, the company said it is “investing substantial sums” to warehousing and autonomous delivery. What is unclear is just how much DoorDash will need to invest to compete head-to-head with Walmart and Amazon. DoorDash’s capital expenditures last year were about 4% of what Walmart U.S. spent on supply chain, customer-facing initiatives and technology.
Perhaps DoorDash can still revolutionize grocery delivery by strategic rather than splashy spending on well-placed warehouses. Instacart delivers from nearly 100,000 stores across North America, which is a huge existing physical footprint. Walmart, by comparison, operates 5,618 stores across the U.S. and Canada, including Sam’s Club. Its physical stores account for 95% of its grocery-related fulfillment square footage, according to data from MWPVL.
Investors might need more details around DoorDash’s physical footprint strategy to feel confident about its grocery strategy. The company hasn’t disclosed how many dark stores it currently runs, or how much scale will be required to meet its grocery ambitions.
There is good reason to think a DoorDash-managed Instacart can fare better than the stand-alone one. DoorDash brings a much denser delivery network. There are at least 10 times as many restaurants in the U.S. as supermarkets, which means there are millions of Dashers, while Instacart only has about 600,000 shoppers. That should help bring speed and efficiency.
DoorDash also has a record of buying well-run assets and running them even better, according to Mark Mahaney, equity analyst at Evercore. The growth rate at U.K. delivery platform Deliveroo, which DoorDash bought last year, doubled in the third quarter compared with pre-acquisition levels a year earlier.
What the combined company undoubtedly will have over Walmart and Amazon is a much larger selection. If DoorDash can apply its laser-focus on delivery experience to groceries and invest wisely in warehouses, it might be able to find a winning formula on speed and accuracy, too.
Competing on price will be more difficult. Given the scale of Walmart and Amazon, they not only have bargaining power over vendors but also big enough ad businesses to help subsidize price cuts. Whether the combined DoorDash and Instacart can get a big enough ad business to subsidize grocery delivery remains to be seen. Retail advertising seems especially vulnerable to disruption from artificial-intelligence chatbots.
There is still some regulatory uncertainty around the deal, which is reflected in Instacart’s 11% discount relative to DoorDash’s offer price. While the current Federal Trade Commission appears more deal-friendly than the one that rejected the Kroger-Albertsons merger, the high cost of living remains a hot-button topic.
That is one overhang for now, but the recent DoorDash selloff presents a buying opportunity. Its shares are trading at a forward earnings multiple of about 40 times, which isn’t cheap but is down from more than 70 times at the end of last year.
With or without the deal, DoorDash remains the leading U.S. restaurant delivery platform that is still growing at a heady pace. A successful Instacart deal would make it even more appetizing.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
