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PaperclipPerfector  27d ago (text post)   2278 thread views

Small-Scale Question Sunday for December 22, 2024

Do you have a dumb question that you're kind of embarrassed to ask in the main thread? Is there something you're just not sure about?

This is your opportunity to ask questions. No question too simple or too silly.

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Does anyone have insight into the business model of food delivery apps? (Doordash, UberEats, Deliveroo, etc.)

Right now, I can order restaurant food delivered at half price with a coupon deal, maybe 60% after the driver's tip. In order to qualify for the deals, I must have it delivered, so if I want half price food from the Thai place on my block, I have to go through one of the apps and get some international student (always an international student) to go in and pick it up, then ride his (always his) scooter ~100m around the block and hand it to me.

I would prefer to pick it up myself, but this invariably voids the deal, and it doubles in price.

Who is paying for this absurdity?

  • It can't be the restaurant. Restaurant margins are notoriously thin, and if they could be doing a pad see ew at $7, not $15, I'm sure the normal price would be lower. I can't get the deal direct through the restaurant either. Has to go through the app.
  • It can't be the delivery person. Even if they're getting paid literally nothing but tips, I'm still saving money on the food. Also, my area has a minimum wage law, which means they must be getting at least that much when they're on the clock.
  • Must be the app companies, right? I'm eating VC capital for dinner every night, and it's cheaper than cooking for myself. But how is this at all sustainable? The restaurants and delivery drivers use all the apps, so they're not capturing market share. They're just burning money. Are they stupid?

It's VC/investor capital.

For example, in its existence as a company, Door Dash has lost over $5 billion.

Nevertheless, their stock is valued at $70 billion (as compared to $7 billion for U.S. Steel) and is up 70% year to date. So clearly someone thinks that, any moment now, they are going to turn the corner and become profitable.

I think they're wrong, but what do I know?

Note: $DASH can actually lose money for eternity and be fine as long as they continue to find new suckers index fund investors to keep buying their stock. In the last 3 years, they've increased their share count by around 20%. They can sell stock and recoup more than the losses from their businesses. It's kinda a ponzi.

Isn't watering down stock illegal?

No. Most companies do it. Some to extreme levels.

I've been seriously looking at my index funds and trying to find a way to avoid taking a bath in the next crash. It's going to be incredibly ugly.

I use something called the Golden Butterfly portfolio which is a prosperity-tilted allocation of the Permanent Portfolio. I chose this because I have no idea what I’m doing.

If you really want to avoid one specific company, short-sell it in proportion to the index fund. For example, if you have 100,000 in an index fund, and Door Dash is 5% of the index, short Door Dash for 5000. This sets up a hedge which effectively strips out Door Dash from the rest of the index. You don't gain when Door Dash goes up, but you also don't lose money when Door Dash goes down.

DoorDash constitutes less than 0.1 percent of Vanguard's "Total [US] Stock Market Index Fund", and is not even large enough to appear in its "[S&P] 500 Index Fund". So it isn't worth worrying about in the end.

The struggle between not wanting to miss out on the rally, but not wanting to be left holding the bag.

I wonder what an "S&P 500, but weighted by profit rather than by market capitalization" index fund would look like.

It probably wouldn't look too different. Most of the megacap tech companies are very profitable. And the S&P 500 already has a profitability filter that keeps out the worst garbage.

On the other hand, something like 40% of the Russell 2000 companies (ranked #1001–3000 by market cap) are unprofitable. A significant percent are essentially zombies, kept afloat by cheap debt and shareholder dilution.

In the last 20 years, stock market breadth has been decimated by software eating the world. I wouldn't be surprised if software has captured >100% of the increase in corporate profits in the last 20 years, with non-software being in a deep depression.

It probably wouldn't look too different.

Actually, according to this (not-very-trustworthy-looking) website, it would look quite different.

Very lazy assessment of the 28 companies that are in the top twenty of either capitalization or profit

Some notable differences:

  • Apple: 12.9 % of capitalization, 6.5 % of profit (6.4-% decrease)

  • Nvidia: 11.2 % of capitalization, 4.0 % of profit (7.3-% decrease)

  • Microsoft: 10.9 % of capitalization, 6.0 % of profit (4.9-% decrease)

  • Amazon: 7.9 % of capitalization, 3.4 % of profit (4.6-% decrease)

  • Saudi Aramco: 6.0 % of capitalization, 12.0 % of profit (6.0-% increase)

  • Berkshire Hathaway: 3.3 % of capitalization, 7.6 % of profit (4.4-% increase)

  • CEMIG: 0.0 % of capitalization, 14.2 % of profit (14.2-% increase)

  • Toyota: 0.8 % of capitalization, 2.3 % of profit (1.5-% increase)

If you pick the most extreme companies by any two metrics, even highly correlated ones, they'll exhibit that kind of divergence, because the tails come apart (you'll also select for anomalies like data entry errors or fraud).

No, this isn't accurate.

Saudi Aramco, CEMIG?, and Toyota are not members of the S&P 500.

Also, the numbers for CEMIG defy logic and are likely the result of some sort of currency translation or data entry error.

Sincerely and Bah Humbug! -Ebeneezer Scrooge

They're called value ETFs (perhaps not exactly but they're an approximation of what you want)

But how is this at all sustainable?

It isn't thats the secret. As for "are they just stupid?" The jury is still out.

The app is using this as a loss leader so that you'll use delivery services costing four times as much when you're stoned at 2 AM with the munchies.

A lot of it is VC, a lot of it is customers at more expensive delivery times who are less price sensitive, a lot of it is restaurant markups.

Consider that food is routinely marked up by restaurants on these apps by 35-40% plus that there are high service fees (which is where the apps make their money) plus delivery fees and tips (which is where drivers make theirs), and you can see why these 30-40% discount codes are ubiquitous. At most the restaurant might make 10-20% less than from an in-person takeout order, but for bulk slop food (which most delivery food is) margins are both higher and fixed costs like rent, salaries for kitchen staff etc are being paid anyway. Raw ingredients are a modest part of the cost of a meal. Takeout apps also let restaurants switch on or off delivery whenever they’re busy or even to do dynamic discounting; on a quiet Tuesday night, a hundred extra delivery orders sold for somewhat less revenue is great.

Say the app’s usual cut is 30% of the menu price plus the 10% service fee. When they issue you the discount code for 40% off, they’re not really burning money so much as not making it (ie Uber Eats will waive a huge chunk of their fee on the restaurant side). The rider is still being paid; the restaurant agrees to a slight discount (nowhere near 40%) in exchange for more sales, the ride share app is revenue-mostly-neutral and hopefully hooks a new customer.

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