DoorDash's stellar IPO could boost Asia valuations

Singapore

DOORDASH'S stellar public market debut could bump up valuations for its peers in South-east Asia's food delivery sector and spur more investments in these fast-growing startups, market watchers told The Business Times.

The food delivery company hit a market value of US$60.1 billion on the first day of trading on the New York Stock Exchange, after its shares soared 85.8 per cent from its initial public offering (IPO) price to close at US$189.51 on Wednesday evening in the US.

The company's strong performance could see investors valuing food delivery startups at a higher valuation multiple, with DoorDash as a benchmark, observers said.

"The capital markets' recognition of food delivery is a confidence boost, because building food delivery operations is hard," said Li Jianggan, chief executive of Momentum Works.

Assuming US$5.7 billion in FY21 expected sales, the company is now trading at 10.5 times price to sales, said analyst Angus Mackintosh.

"The sales forecast for FY21E assumes growth of 85 per cent, which is assuming a slowdown in its business from over 200 per cent growth in 2020. In contrast, Just Eat Takeaway trades at five times FY21E price to sales, and it is one of the more expensive comparables," he said.

Although food delivery startups have remained largely unprofitable amid high operating costs, thin margins and steep marketing expenses, public exuberance towards these so-called pandemic winners has led companies like DoorDash to experience a boost in investor interest.

Other publicly traded stocks with businesses in food delivery have similarly rode the wave of investor bullishness. Year to date, Meituan is up 177.3 per cent, Uber is up 73.6 per cent - though dragged down by its transport business - and Delivery Hero is up 48.4 per cent.

Mr Mackintosh said the DoorDash valuation sets a new precedent for food delivery companies and will be referred to as a reference for valuing Gojek and Grab, which have growing businesses in food delivery. However, he added that these companies might trade at lower multiples given the drag of their ride-hailing business.

However, observers noted that the South-east Asian market could present its own set of challenges and is vastly different from single country markets like the US or China.

Vishal Harnal, general partner at venture capital firm 500 Startups, said: "The high watermark set by the DoorDash IPO might not have a profound effect on South-east Asia's food delivery startups."

He noted that it is important to take note of the context of the listing, such as the exuberant public market sentiment on "all things technology", as well as high Covid-19 induced consumption of food delivery in the US.

"However, the listing price and ongoing performance would still be useful guidelines for investors and founders in South-east Asia to keep in mind," Mr Harnal told BT.

Chen Guoli, professor of strategy at Insead, said that South-east Asia is a much more fragmented market as compared to the US or China.

He told BT: "To be a market leader for a single country in the region is not sizeable enough to gain sufficient scale for network advantages. It is also very difficult for one company to be the market leader in many different countries across the region."

Simply investing in market share - of which DoorDash has about 50 per cent - is not the answer to turning a profit, Prof Chen said.

He noted how China's Meituan managed to become more profitable after it expanded its revenue streams to higher margin businesses, such as providing merchants with a platform to market their services and goods.

Momentum Works' Mr Li said: "We should also look beyond food delivery and see these companies as essentially building a fluid, efficient hyper-local fulfilment network. The value of this infrastructure, if it breaks even through food delivery, is vast as it enables a lot of other possibilities."

Such possibilities include ventures in grocery delivery, e-commerce and much more, he said.

"Retail is still a huge market that not much has been cracked by e-commerce in this region. Even though things have grown a lot this year, we are still talking about single digit penetration of e-commerce in retail."