Description

DHER is a best-in-class operator with market-leading positions growing at a +25% CAGR with +400% upside at current levels. Below we summarize the key points for our investment and welcome further discussion in the comments.

Company background

·           German listed online food delivery that operates globally

o   At 44.29, a 11.6bn EUR mkt cap / 13.1bn EUR TEV (adjusting for stakes, cash, NCI)

o   Comparable scale to Doordash & UberEats based on $GMV but better market positions & growth (95% of GMV in #1 countries & +25% growth CAGR)

o   Trades for 0.15x 2024 GMV pro forma for Glovo acquisition & ~13x 2024 EBITDA

o   ~Half of GMV in South Korea, ~15% is other Asia (mostly Taiwan / HK / Singapore),~18% MENA (mostly Saudi Arabia + Turkey / Kuwait / UAE), 15% Europe (mostly Nordics + Glovo is Spain/Italy), 5% South America (i.e. Argentina)

·           What do they do?

o   Deliver food, historically from restaurants but broadening categories, with a focus on logistics network (vs. legacy marketplace model of having restaurant employee do the delivery)

§  Dominant market share in all major markets & positively inflecting profitability profile

o   Operate largest global network of “dark stores” (aka quick commerce) that deliver grocery & convenience items, usually in <15 mins (think GoPuff, but with 2x locations)

·         Stock got crushed in tech/growth selloff late 2021/early 2022 and then down 39% on earnings

o   On earnings - In the face of a market that has shunned loss making stocks, Niklas (CEO) and team decided to aggressively ramp spend across their entire business, particularly on integrated verticals (quick commerce) and at newly-acquired Glovo, which are two parts of the story investors know very little about and about which they have given limited disclosure.

§  On the call, they refused to commit to any end of this burn or shift to profitability. Instead they promised 200-350bn in GMV by 2030 at 5-8% LT margins - sending the message that they were not particularly interested in doing anything ST that jeopardizes the 10bn - 30bn 2030 EBITDA opportunity they see

o   As a result of the higher than expected losses, sellside asked about liquidity options for out-of-the-money converts. Management was not prepared to answer and didn’t inspire any confidence on the call. This caused the stock to trade as if there are real liquidity issues.

§  DHER has 2.4bn of cash, will burn ~1.5bn this year and some amount in 2023 (we think ~400mm though highly dependent on opportunity set of attractive markets to invest in). Converts are due every year from 2024 to 2029.

o   GMV guide was light vs. expectations – DHER had blessed street expectations of low-30%’s growth on Glovo M&A call (1/11/22) – decided in November to exit structurally unprofitable business in Asia (small AOV orders generally outside Korea) but immediately did not show material improvement in profitability & paired w/ guidance for higher than expected losses

Investment thesis

·         Liquidity is not an issue – from our conversations with IR & sellside, DHER is very focused on quickly managing liquidity in a non-dilutive way to ease market concerns. The options on the table are 1) debt with reasonable interest 2) selling smaller, loss-making markets (I.e., maybe sell Asia ex. Korea to Grab) 3) reducing investments in non-core growth opportunities to preserve cash

o   DHER wants to do something quickly, which is likely a term-loan, and also understands market expectations for profitability. Debt could come along with divestitures or clarified guidance w/ a reduced “wish list” of spending

o   None of these options will sacrifice the significant growth opportunity ahead of DHER

o   The market has reacted positively to previous industry focus on exiting non-profitable markets

o   Solving investor concerns on liquidity is likely a very near term (<90 days) catalyst to push the stock back to levels pre-4Q results; however, we think the upside opportunity is much greater for long-term shareholders

·         Spend on Integrated Verticals creating value, not destroying

o   Everyone in the public space is investing here – consumers love it and demand is there

o   You could compare to GoPuff, which is smaller than DHER and valued at $15bn (~DHER entire value)

o   Could also look at as: ~1.5K stores YE’22 * target 1k orders/day * 1.0-1.3 profit/order = ~280mm EBITDA (which so far cost them ~1.3bn, i.e. 4.7x)

o   We trust that Niklas + every VC on the planet wouldn’t spend aggressively here if they didn’t see solid long-term economics

·         Core food delivery business growing rapidly and inflecting to profitability

o   Big part of our thesis for DHER has always been - they are ruthless in managing for what they view as the optimal long-term outcome by (1) adjusting their business model to address the largest possible market (i.e. 2017-2018 shift to own-delivery) and (2) leveraging pain to force good competitive outcomes (i.e. Germany and South Korea)

o   That they have been highly successful executing this strategy in the past, as evidenced by solidified competitive positions across their markets and positively-inflecting profitability in food delivery

o   Growing GMV at ~31% CAGR ‘21-’24 and trade at ~13x our 2024 EBITDA (1bn or 1.2% of ‘24E GMV, ~1/5 of long-term target profitability)

o   

·         We see this as a near-term entry-point on liquidity concerns to own a high quality compounder at an extremely attractive price. Longer-term, we think valuation will reset as DHER breaks through the profitability wall & prints $billions of EBITDA while growing EBITDA at +100% YoY

Valuation

·         Think this is the most attractive entry point we have seen since they sold Germany in 2018, perhaps more

o   Value placed on integrated verticals is enormously negative, implying people think that not only is that business worthless but that it will also potentially precipitate a negative liquidity event.

o   Even if this business fails, we think that DHER has enough levers available to inflect towards profitability and avoid serious dilution, and upside is attractive. If integrated verticals turns out to be value positive the upside is extreme.

·         We think this business can easily do 5% GMV margins (EBITDA) longer-term, potentially higher

·         At 5% GMV margins on 2026 GMV of 100bn, that’s ~5bn of EBITDA (~3x EBITDA multiple today net of cash burn)

·         At 18x 2026 EBITDA (equivalent to 0.9x GMV), PV of stock at 10% discount rate is ~233 today (+425% from current)

·         If you don’t have the stomach to invest in the equity, the converts are a no-brainer

Catalyst

Non-dilutive capital raise or divestment of loss-generating markets

Continued growth & inflection to profitability