Square Selling Caviar to DoorDash is a Win for Both Companies
In conjunction with Square’s earning’s release this afternoon, investors were surprised to see another announcement that the company was selling its Caviar business to DoorDash for $410 million. The deal is a cash and stock offer, and will likely close by the end of this year according to the press release.
Now, before we start analyzing the deal (and why I think it is a win-win scenario), let’s go through a short history of what Caviar is so we understand what DoorDash is getting. Caviar was founded in 2012 with the slogan “Focus on food – we got the rest.” Caviar supposedly (I have no personal experience with the product) enables a restaurant to easily do delivery, take-out, and catering, with a comprehensive set of easy-to-use digital tools.
Square bought the company five years ago for $90 million and integrated its digital offerings with Square’s subscription products. Rumors have abounded for years that Square wanted to sell Caviar (and for a lot less than $400 million) because it was weighing down on the company’s margins.
Why This is a Win for DoorDash
Without trying to speculate too aggressively since DoorDash is a private company and does not give out any financials, it seems to me like their core business has dogshit margins. One reason to believe this is they’re not that different from Uber or Lyft, and we’ve seen from their public financial statements what terrible cost structures those businesses have.
Another reason I believe DoorDash is hemorrhaging money is I actually drive for them (big-time entrepreneur here nbd). They routinely pay me $6.50 or more for short, 10-15 minute delivery orders when I know customers are paying a lot less. When variable costs are higher than sales it is almost impossible (well, actually totally impossible) to run a profitable business.
What Caviar does, besides give DoorDash some slight consolidation in the food delivery space, is a way up the restaurant food chain. The subscription offering that restaurants use definitely has higher margins than DoorDash’s core offering, which will help them on the road to profitability. DoorDash’s scale will also help Caviar expand to more regions of the globe. The partnership will work in the other direction, with Caviar users (which, if you are confused, are the restaurants) being more inclined to use DoorDash as their delivery tool.
Why This is a Win for Square
Square had another solid earnings report (it is one of our top picks in the MBP), with revenue up 44% and subscription revenue up 87%. The announcement about selling Caviar may have come as a surprise, but I think it is a good move for the company. I’ll lay out my reasoning below.
First, Caviar never really fit into what Square wants to be as a business, which is an enabler for digital payment transactions for businesses and individuals (they own the Cash App). Caviar is adjacent to that business vertical and will work better being a Square partner than a subsidiary.
Next, I believe divesting from Caviar will allow Square to build on its relationship with DoorDash and other delivery start-ups, which are growing extremely quickly at the moment. Here is what Square said in their press release about the topic:
“The transaction continues to build on the partnership between DoorDash and Square. DoorDash is currently integrated with Square for Restaurants point of sale, which streamlines the acceptance of online and in-person orders for merchants, and in the second quarter Cash Boost partnered with DoorDash to provide instant rewards when customers use their Cash Card at DoorDash.“
So while Caviar will not be owned by Square, they will still benefit from its continued growth.
Third, not having money-losing Caviar (which the company has complained about before) will help Square on the road to profitability and better cash flow numbers. This is important because as they mature as a company investors will be expecting not just growth on the top-line but on the bottom-line as well.
Lastly, the sale will add cash to Square’s balance sheet (albeit through some share dilution) that will enable them to invest more aggressively in their core initiatives that I mentioned above. Here is what CEO Jack Dorsey had to say about it:
“We are increasing our focus on and investment in our two large, growing ecosystems—one for businesses and one for individuals. This transaction furthers that effort, and we believe partnering with DoorDash provides valuable and strategic opportunities for Square.”
What Dorsey and his team are focusing on, and what investors should be looking at, are the growth in their business (point-of-sale, organizational tools, Square Capital) and personal products (the Cash App and Cash Card). They are riding some big-time momentum, and are one of the biggest innovators in what is likely a trillion-dollar industry.
Disclosure: The author is not a financial adviser, and may have an interest in the companies discussed.