Couch Potato #1 - Uber & DoorDash Earnings

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Q2 Earnings: Uber and Doordash

Marketplaces have been penalized in the public markets recently. Investors have balked due to historical poor profitability, core US market maturity for some, and competitive pressure on margins. Q2 earnings season has begun and marketplaces have a lot to prove. Are they glorified cash destroying businesses, or can they actually build sustainable businesses and create shareholder value at scale.

Two marketplace heavyweights - and competitors - Uber and DoorDash announced earnings last week. You have probably already seen the headlines about Uber. First quarter with GAAP operating profit. It also broke through the $1B FCF glass ceiling in this quarter. Doordash similarly had “its best quarter ever” with increase in orders and frequency per customer. While still not profitable - contribution margin has steadily increased to 29% (up from 23% a year ago).

Look, I am no equity researcher. My interest in these companies is driven by my interest in marketplaces. Not trying to predict or estimate share price. Seeing these businesses at scale helps me better understand new marketplaces and dream about how they scale with higher fidelity.

It was interesting to analyze these businesses side by side. While on the surface they are similar businesses - my focus is on three things:

1. Business Strategy & Vision

2. Key marketplace metrics driving these businesses and how they compare

3. Market Expansion

Strategy and Vision

At its core, both businesses are local marketplaces connecting consumers with mobility (Uber) and delivery (Uber & Doordash). However, both businesses think of their platform slightly differently.

Uber primarily remains a mobility company. 61% of revenue comes from mobility. Management has expanded their marketplace take rate from 26.6% in Q3 2022 to 29.3% last quarter. The mobility business unit, despite being more mature, is still growing faster than delivery (which had a slight contraction in Q2 2023). Mobility is also higher margin than food delivery for Uber.

I believe Uber’s ultimate goal is to become the transportation operating system for consumers. The data above highlights that mobility continues to be the biggest business driver, product expansion strategy further accentuates this strategy. Expansion into other types of mobility. In fact, Uber is testing (a) the ability to get flights on the app, (b) traditional taxi hailing, and (c) public transport ticket purchases — all embedded within the core Uber app experience. You want to go from A to B, all your options are integrated within Uber. This is why they also added “walking” as a category in the app (which I thought was ridiculous at first). But it makes sense. If I am deciding on the modality of my transportation within the Uber app, I need to be able to compare walking time directly within the interface.

In contrast, Doordash is leaning into delivery. While it started with food, it has recently expanded into grocery. Now it’s even running tests with traditional retailers in other categories like sporting goods, pets, and health and beauty. It’s trying to become the retail operating system. Think of it like a local Amazon.

The goal for both Uber and Doordash is to increase wallet share. Improve customer long term value (LTV) but making customers buy more services over time. Let’s look at this.

Marketplace metrics: Frequency and Take Rate

I have previously written about how marketplace businesses are a function of two core metrics: frequency and take rate. But that’s missing an important dimension - time. In reality, a marketplace is acquiring a user to drive continued usage. This means a customer’s long term value (LTV) = Frequency (per month) x Take Rate x number of months of activity.

New product expansion serves to increase frequency. There is a natural saturation point for Uber mobility on a per customer basis. I tend to take an Uber 4-5x per month. The average mobility user engaged 5.4x per month on Uber. Yes, Uber can optimize some users lower on the engagement curve but stealing share away from cabs or Lyft. But most users tend to max out at 5x / month. If you want them to use Uber more than that, you have to give them something else. In Uber’s case, that is food (Uber Eats), rental cars, public transport tickets, and in some markets, flights.

Doordash usage behaves similarly. I’ll be honest, I order Doordash 10-12x / week. Even if I ate out every meal, Doordash can get a maximum of 14x usage from me per week. Okay, how do we increase that? Expansion into convenience stores and grocery stores where Paraj goes 1x/week. Now suddenly Paraj went from 40 orders / month to 44 orders. That’s a 10% increase. Now layer in some specialty retail and get another 1 or 2 points of engagement and stretch that over the several year retention of a high volume customer like me. I become a very profitable acquisition. Ironically this publication is called Couch Potato so starting with food delivery seemed appropriate.

I wish Doordash would report active user data so we can compare and contrast consumer behavior on the two platforms. Uber Eats’ margin looks to have stabilized around 19% compared to Doordash’s 13%. But Doordash is growing 2x faster than Uber’s Delivery division.

Penetration and Market Expansion

Let’s shift our focus back to the delivery battleground where the two compete head to head. The core food delivery space is massive. The National Restaurant Association anticipates $997B in gross bookings in 2023 in the US alone. This implies that both Uber Eats and Doordash have barely scratched the surface within their core offerings with sub 10% penetration.

Despite this, it’s clear to assume that non US markets account for a vast majority of current growth. In part because both businesses are investing more in nascent markets and seeing a higher ROI on those acquisition dollars compared to the more mature US market. I like that Uber breaks down their revenue by geography and all non US/Canada markets are growing by 30%+ YoY.

Finally, I will be remiss if I didn’t name drop autonomous vehicles. Here is the deal - the entire cost basis of these marketplaces is the human servicing the transaction. Autonomous vehicles could effectively turn this into a SaaS margin business where both these businesses can slash prices and take 90%+ of the transaction. I think it’s at least half a decade away.

Marketplace Multiples - 8/6/2023

Vertical Software Multiples - 8/6/2023

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