In a bold move for expansion, a food delivery and retail business DoorDash (NYSE: DASH) announced on November 9 its acquisition of Finnish delivery company Wolt Enterprises. The American company is spending $ 8.1 billion in shares to gain a significant foothold in Europe and Japan.
The stock market responded with glee, sending DoorDash’s stock price soaring about 30% by November 15. Let’s take a look at why the acquisition could be bullish in the short term, but doesn’t solve a big long term problem facing DoorDash and the rest of the food delivery industry.
What Wolt brings to the table
As the market reception of the acquisition of all shares has cooled after the initial spike, DoorDash is acquiring significant current and future expansion potential by making Wolt its subsidiary. Wolt is currently present in 23 countries, many of them in Europe, such as Germany and Poland; Central Asia, such as Kazakhstan and Azerbaijan; and Japan. Its annualized gross order value (GOV) – using the third quarter as its final quarter – increased 130% year-over-year to about $ 2.5 billion.
Note that GOV is not the same as income; it is a measure of the value of orders delivered by the company to restaurants, with Wolt receiving some in the form of fees. This, however, remains an overall indicator of the company’s success in generating business.
The acquisition gives DoorDash a presence in 22 countries where it previously had no delivery service. On DoorDash’s recent third quarter earnings conference call, CFO Tony Xu said his company intends to aggressively expand the subsidiary because “the potential of our combined markets creates a substantial opportunity to increase gross order value to multiples of its current level. ”
Wolt, like other delivery companies, is driving rapid revenue growth while continuing to experience persistent net losses in earnings. In 2020, revenue increased by around 300% to $ 345 million, according to a press release from January 2021, but nonetheless recorded a full-year net loss of $ 45 million. It also secured approximately $ 856 million in funding, allowing for its rapid expansion despite losses.
There are several important parallels between DoorDash’s acquisition of Wolt and its European rival. Just eat take out‘s (NASDAQ: GRUB) buyout of ailing American food delivery service Grubhub. In each case, the acquisition resulted in a significant expansion to a new continent. Grubhub is also driving revenue growth: around 22% for the first half of 2021, according to an August report.
However, the stock market judged the acquisition of each company very differently, pushing DoorDash’s market cap up to billions, while lowering the value of Just Eat stock by about 81% in the past 12 months. last months. Activist investor Cat Rock Capital urges Just Eat to sell Grubhub, though he says, “We think the market is definitely wrong when it places great negative value on Grubhub,” a valuation arguably supported by objective measures.
The stock market seems to prefer DoorDash over Just Eat, and that extends to decisions about new acquisitions. DoorDash, however, still grapples with the same major structural issues as Just Eat, Wolt Enterprises and other on-demand delivery companies, with revenue growing at a breakneck pace while the bottom line remains deep in negative territory.
DoorDash third quarter 2021 results show explosive 89.5% year-over-year revenue growth for the first nine months of 2021, from $ 1.9 billion to $ 3.6 billion . Still, his net loss fell from $ 149 million to $ 313 million in the same period, swelling 110% year-over-year, a faster pace than his earnings gains.
To stay afloat, DoorDash issued more shares, increasing its number of shares by 649.6%, from 44.6 million shares outstanding on September 30, 2020 to 334.3 million a year later. The cost of having enough cash to keep operating while generating an uninterrupted series of net losses is a massive dilution of one’s stock.
The question remains: How can DoorDash improve its bottom line to meet investor expectations and generate net income, and will its acquisition of Wolt help it do just that?
DoorDash may expand, but the scaling issue persists
The reason the major food delivery services seemingly generate an endless series of net losses may well be the scale. No matter how advanced the delivery application is, the actual delivery remains tied to individual actions in the physical world. No amount of data collection, artificial intelligence route optimization, or fluid interfaces can eliminate the minimum time for driving a vehicle on a road with speed limits and traffic to a destination.
Another problem with scaling is that while a diner can serve dozens of customers simultaneously without increasing its staff, the only way to increase concurrent deliveries is to use more drivers, stack spending faster. These constraints also apply to all types of on-demand delivery, which is why adding DoorDash to the delivery of items in addition to food did not have positive results.
A delivery company can potentially solve the scaling dilemma, perhaps with cheap autonomous drones. That moment has not yet arrived, however, and simply expanding into Europe will not change the basic delivery equation. The purchase of Wolt will almost certainly increase DoorDash’s revenue significantly, but its new subsidiary also generates net losses and will likely only make the overall net losses of the combined entity even greater.
Takeaway for investors
So, is DoorDash a buy from food delivery stocks after its big acquisition?
The answer probably lies in something impossible to directly quantify: traders’ general taste for action. Short-term sentiment likes DoorDash and dislikes Just Eat, which means DoorDash is arguably a better buy. DoorDash’s acquisition of Wolt is bullish because Wall Street rates it favorably, even though it is very similar to the Grubhub acquisition of Just Eat, which Wall Street was evaluating negatively because of its sentiment about Grubhub.
The purchase of Wolt is expected to give DoorDash several quarters of flashy revenue growth news with which to bolster current Wall Street optimism. It will likely also greatly increase the bottom line if DoorDash fixes the scaling issue.
These facts could extend DoorDash’s bull run through 2022, and possibly into 2023. His long-term fate is extremely uncertain, and buying Wolt won’t change that, but if you’re looking for short-term gains, it looks like a potential viable food delivery stock.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.