Food-delivery investors are overstuffed

It wasn't a good week to be a side dish in the food-delivery space.

After roasting No. 2 U.K. delivery platform Deliveroo in its public debut on the London exchange on Wednesday, investors moved to scorch a U.S. middleman. Both could leave lasting burns on the sector.

Back in December, it seemed investors were craving food-delivery stocks with almost as much fervor as they were the vaccines. Now that the shots are here, investors' tastes seemed to have changed. Shares of U.S. market leader DoorDash closed 86% above their public offering price on their first day of trading late last year, but have fallen nearly 30% in the months since as restaurants begin to welcome back indoor dining.

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DoorDash, at least, still boasts a monster market value of over $50 billion on a fully diluted basis, nearly 8.5 times the size of its closest U.S. pure-play competitor. Other companies in the sector to go public lately haven't been so fortunate. Software-as-a-service platform Olo, which counts delivery platforms as both competitors and customers, has seen its shares fall 24% since its public offering less than two weeks ago. Meanwhile, the hotly anticipated public offering for London-based food-delivery platform Deliveroo closed 26% below its offering price Wednesday.

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It appears investors' appetite for food delivery can be spoiled by a story -- much like a meal -- with a little hair on it. Despite increasing revenue 54% last year amid the pandemic, Deliveroo still managed to lose money, even on the basis of adjusted earnings before interest, taxes, depreciation and amortization. Now, future profitability is even more in question after Uber Technologies recently lost a U.K. court case that led to a landmark reclassification of its ride-hailing drivers as workers, entitling them to benefits such as vacation pay and pensions. That decision has led skeptics to worry food-delivery drivers will be next on the regulatory menu. For Deliveroo, which does roughly half its sales in Britain, it would be particularly costly.

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Olo, on the other hand, may see profit fade. As briefly discussed in its S-1 filing, the software-as-a-service company is facing a lawsuit from its largest customer, DoorDash. According to paperwork filed last Tuesday, DoorDash is alleging Olo cheated it out of tens of millions of dollars in excess payments based on most-favored-nation clauses in its contract, guaranteeing it lower prices than its competitors. Losing even a fraction of those fees could be a significant hit to Olo, which generated less than $100 million in revenue last year. Olo called the lawsuit's allegations baseless.

Taken together, investors' chilly reception for Deliveroo and Olo could mean more investor scrutiny lies ahead for the sector. For Uber, threats are mounting for driver reclassification more globally. Moreover, DoorDash already said in February it expects its gross order value growth to slow significantly this year after a gangbusters 2020, sending shares down following its fourth-quarter report.

Investors' waning appetite for peripheral players might bode poorly for U.S. industry leaders from whom consumers may have had more than their fill.