Just Started Investing? Be Careful!
By: Maximilian Perkmann
Tags: Startup, Business, Investing, Finance, Stock Market

2020 will be known as a record-breaking year in many regards. The amount and the size of IPOs (Initial Public Offering = stock market launch of a company) was exceptional.

Photo by Jamie Street on Unsplash

Many of the companies that launched an IPO in 2020 have one thing in common: the numbers were really bad. The following concept explains why:

With the increasing amount of new investors on the stock market, also the TAM (Total Addressable Market) increases for companies. Those “new” investors are apparently buying everything right off the shelf. We are in the middle of a buyers-market and many companies are taking advantage of that. Especially for companies running business models with a calculated loss (DoorDash for example), this new momentum comes in handy. By funding huge amounts of money on the stock market with an IPO, companies like DoorDash are trying to grow fast until they have a monopoly position.

It’s quite easy to grow fast if you sell your goods below the cost price.

Let us have a closer look at DoorDash.

About DoorDash

Photo by Griffin Wooldridge on Unsplash

DoorDash was founded in 2013 by four Stanford students led by CEO Tony Xu. The startup focused on the suburbs instead of entering a battle for Manhattan or downtown Los Angeles. Today, Doordash is the market leader in the U.S. ahead of Uber Eats. DoorDash focuses its business on smaller restaurants that have no possibility to provide a delivery-service. By using DoorDash, the restaurants have no risk on their side (no drivers or fixed costs).

In 2019, Doordash’s revenue was $900 million and its loss was $450 million. The company spent more and more in a race to capture the US market. However, the industry had recently benefited from the effects of the corona crisis. Doordash’s leadership believes that trend will continue. Berlin-based food delivery service Delivery Hero had also recently seen strong revenue growth. Delivery Hero has been listed in Germany’s leading Dax index since summer and most recently had a market capitalization of just under 20 billion euros.

Valid Business Model?

The company achieved 700 million orders last year, with an average of 33$ per order. That means they have had external sales of 20 billion dollars. Sounds profitable, doesn’t it?

NO

External sales include also the salary of the driver and the restaurant’s payout. About 60% goes to the restaurant. The driver gets 8$ per order (roughly 25% on average). 15% stays with DoorDash, being used to finance the platform, the acquisition of the clients, setup of the restaurants, workshops with the drivers, handling of the payments, and the infrastructure.

Even though they managed to conquer more than 50% of the US market, the company is still not profitable.

Careful, Young Padawan

Still basing on DoorDash’s business model: do you think the company will be profitable with 40 billion of external sales? Maybe, but actually (just my personal opinion) I guess not — and that’s the crux:

I really enjoy seeing so many new investors in the markets, but most of them are only following the hype without a profound knowledge of the area. After all, investing in stocks means investing in real companies.

“The secret to investing is to figure out the value of something — and then pay a lot less.” — Joel Greenblatt

Warren Buffett, known as one of the most successful investors, has taught us value investing. Value investing essentially consists of determining the book value of a company and buying when the stock’s value is less.

Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively ferret out stocks they think the stock market is underestimating. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond to a company’s long-term fundamentals. The overreaction offers an opportunity to profit by buying stocks at discounted prices — on sale. — învestopedia.com

If you do not take the time to “study” the companies numbers, goals, and structures, you may end up with a gamble instead of an investment. Be careful!

Invest in books, not IPOs

For anyone starting with investments, which is highly appreciated, consider an investment into books and self-education first.

The best investment you can make is an investment in yourself. The more you learn, the more you earn. — Warren Buffett

There are many different ways to invest profitably, and there are many sources where you can learn the information. There’s nothing new under the sun, and no marketer has a corner on teaching any particular type of investment strategy. There is no right or wrong, but the best you can do is to inform yourself and figure out your own opinion.

Photo by Ed Robertson on Unsplash

Take Away

DoorDash is no bad company by any means, but if you are just starting your investments you should keep in mind that “All that glitters is not gold”. Do your research, if you still think DoorDash (or any other company) is a great deal: go for it!