DoorDash Inc (NYSE:DASH) shares dropped 8% on Wednesday morning after Amazon.com, Inc. (NASDAQ:AMZN) announced a new partnership with DoorDash competitor Grubhub. The Amazon-Grubhub deal prompted one Wall Street analyst to cut his price target for DoorDash.
The Analyst: Bank of America analyst Michael McGovern has reiterated his Buy rating for DoorDash, but cut his price target from $90 to $85.
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The Thesis: Amazon and Grubhub announced on Wednesday that Amazon Prime members will receive one year of Grubhub+ for free, including $0 delivery fees. The offer comes as part of a deal between Amazon and Grubhub parent company Just Eat Takeaway.com NV - ADR (OTC:JTKWY), which traded higher by 18% on Wednesday morning. Under the terms of the deal, Amazon will acquire warrants representing a 2% ownership stake in Grubhub and can acquire additional warrants representing up to 13% ownership if certain performance obligations related to customer acquisitions are met.
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Grubhub+ currently has about 3 million subscribers, compared to about 10 million subscribers for DoorDash's DashPass, McGovern said. However, given Amazon Prime likely has more than 100 million subscribers and food delivery being a relatively elastic market, he said the Grubhub-Amazon deal could be a significant headwind for DashPass subscriber growth.
"Ultimately, we expect the Amazon/Grubhub incentive program will have little impact on DoorDash’s near-term growth or margins, with DoorDash already at nearly 60% US market share (while Grubhub is at just 13%, per Second Measure), but we anticipate some overhang for the stock due to the long-term potential for Amazon to re-enter the food delivery industry," McGovern said.
Benzinga's Take: The good news for DoorDash investors is that McGovern said Grubhub+ remains an inferior offering compared to DashPass, even if Amazon is now backing Grubhub. However, it's never good news for any business of any kind to find out they will now be competing against Amazon.
