Postmates looks to deliver investors a strong public debut
February 26, 2019 | Blog

Postmates looks to deliver investors a strong public debut

Postmates is entering the last mile of its road to an IPO. The company, which operates at the crossroads of last mile delivery and the sharing economy, recently disclosed it confidentially filed for a public offering with the Securities and Exchange Commission.

Founded in 2011 by Sam Street, Sean Plaice, and current CEO Bastian Lehmann, Postmates now operates in hundreds of North American cities. While the company originally sought to deliver any type of product, food has become its top category in recent years. Private investors last valued Postmates in January at an estimated $1.8 billion in its Series F primary round. The firm has raised $680 million from venture capital powerhouses like Tiger Global, Founders Fund and Spark Capital.

Will the public markets praise Postmates come IPO?

The Upside Scenario

Last-mile delivery is large and growing Postmates operates in a large and growing market, which could lead to healthy returns for risk-on investors. Morgan Stanley estimates the food delivery market to hit $30 billion, or 11 percent of all restaurant spending, by 2022.While Postmates says its couriers currently reach 70 percent of U.S. households, the unicorn will need further market penetration in order to hit profitability. Postmates will presumably use its IPO proceeds to rapidly expand into new geographies.

Demographic tailwinds: tech-savvy Millennials come of age From Baby Boomers to Millennials, the next few decades will mark the largest transfer of wealth in recorded history. Millennials, who already account for the largest share of the global population, also tend to use on-demand delivery services at a higher rate compared to Gen Y and Boomers. This combination of money and tech savvy could push Postmates to profits in the coming years. In fact, social media influencer Kylie Jenner and tennis star Serena Williams, celebrities with large Millennial followings, boosted Postmates’ popularity after they praised its service.

Partnerships with big chains and tech giants Postmates shuttles grocery orders for Walmart and enjoys an exclusive partnership with Apple. We believe these relationships demonstrate the breadth of Postmates’ platform. Attracting more corporate customers will likely lead to better product offerings, which could drive additional user growth and revenue.

Postmates Unlimited creates stickiness The unicorn launched Postmates Unlimited subscriptions in 2016. For $9.99 a month, subscribers can get unlimited food deliveries on orders greater than $15. This service offers the company the prospect of reoccurring revenue, increased cash flow, and greater user loyalty. Investors will likely focus on reoccurring customers and how often they use the platform when valuing the company at IPO.

The Downside Risk

Competition abundant and well-funded The biggest obstacle to Postmates’ profitability is competition. The company faces several competitors in the food delivery space including UberEats, Amazon Restaurants, DoorDash, Square’s Caviar, GrubHub, Yelp, Ritual, Instacart (on the grocery delivery side of food), and the traditional restaurant delivery. Postmates needs to differentiate their platform from the field of well capitalized alternatives; DoorDash, which raised $250 million last August, is seeking an additional $500 million. While Postmates controls a healthy 42 percent share of the Los Angeles market, such dominance elsewhere is not guaranteed looking to the future.

Acquisition by incumbent unlikely Given the crowd of competitors, we think it’s unlikely someone will acquire Postmates after an IPO. Postmates users who are not subscribers likely search for the delivery service which offers the best coupon of the day. Delivery platforms bleed cash to attract customers and will likely have to do so as long as competition remains intense; Postmates itself has been offering $100 in delivery credit to new users. Companies looking to enter the food delivery industry are more likely to build their own network as seen with UberEats and Amazon Restaurants. However, Postmates could eventually become an attractive acquisition target if the company demonstrates strong brand loyalty among users.

1099 or W2? Like many on demand services, Postmates faces legal obstacles to reach profitability, specifically how they categorize their couriers. The company currently considers them independent contractors and thus does not withhold taxes or pay for benefits. If regulators force Postmates to classify couriers as employees, generating profits will likely be challenging.

Proof is in the pudding, profitability must be in sight Investors’ most pressing concern is likely Postmates’ road to profits. Pure play competitor GrubHub enjoys a high enterprise value to forward looking revenue compared to Yelp and Japanese ecommerce firm Rakuten. GrubHub is profitable, generating over $350 million in gross profit in fiscal 2017. With over 50 percent of the U.S. market as of February 2018, investors are likely place a higher multiple on GrubHub. Postmates, on the other hand, held only 9 percent of the American market. We think investors will likely assign Postmates a similar value to GrubHub albeit with a market share caveat.

Source: SharesPost Research; Y-Charts; Business Insider (As of 2/8/2019)

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This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

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Alejandro Ortiz

Alejandro Ortiz

Alejandro is a Research Analyst, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, he was a Valuation Analyst at Duff & Phelps with a focus on TMT industries.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation, and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own financial advisors before making any investment decisions. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about the subject matter therein, including all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be during their employ directly or indirectly related to their specific views contained in this report.

Analyst compensation is indirectly based upon the growth and success of SharesPost, Inc., including the overall performance of its subsidiaries, the individualized performance of any such analyst, and the development and progression of the overall research effort. SharesPost, Inc. earns revenue from, among other avenues, brokerage sales, and therefore the analyst may indirectly benefit from research reports that have the ultimate effect of increasing trading activity, either through SharesPost Financial Corporation and/or with SharesPost Investment Management, LLC.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.