DoorDash Stock: Don’t Buy The Dip
DoorDash (NYSE:DASH) stock has declined by about 30% over the past month, driven partly by the broader sell-off in technology and high growth stocks. So is this a good time to enter DoorDash stock? We don’t think so and believe that the stock has a further downside. DoorDash was a big beneficiary of the Covid-19 related lockdowns last year, with revenue expanding by over 3x in 2020. However, growth is likely to slow to under 30% this year per consensus estimates, as people start venturing back into dine-in restaurants, with Covid-19 cases declining in the U.S. and the vaccination drive gaining momentum. As this trend becomes visible through the company’s quarterly reports, it’s likely that investors will re-value the stock lower. For perspective, at its current price of $145 per share the company trades at a relatively rich 12x projected 2021 revenues.
Moreover, longer-term profitability remains a real concern. DoorDash, despite being the largest player with about 56% share of U.S. meal delivery sales in January [1], was loss-making last year and is only expected to barely break even this year on an adjusted basis. The delivery market is also competitive and there is little to differentiate the major players besides delivering food at the lowest price possible. There are also no real switching costs for users, who often use multiple apps.
[2/16/2021] Why DoorDash Looks Expensive
Food delivery startup DoorDash (NYSE:DASH) stock has rallied by around 45% since the beginning of 2021 and currently trades at levels of about $200 per share. So what drove the big rally in the stock? Firstly, sell-side coverage of the stock increased meaningfully in January, as the quiet period for analysts at banks that underwrote the IPO ended. Although analyst opinion has been somewhat mixed, it nevertheless has likely helped increase visibility and drive volumes for DoorDash’s stock. Secondly, DoorDash is apparently looking to enter Japan, where delivery businesses are growing quickly driven by the pandemic. The company currently only operates in the U.S., Canada, and Australia. Separately, DoorDash also acquired Chowbotics – a startup that sells robotic equipment that can automate the process of making meals such as salads and poke bowls. It’s possible that DoorDash’s increasing interest in automating food production is also helping the stock.
That said, we believe DoorDash stock remains overvalued trading at about 17.5x consensus 2021 revenues. Competition in the delivery space is mounting and with highly effective Covid-19 vaccines being rolled out, it’s likely that growth in the delivery market could also cool off, as people start venturing back into restaurants. See our analysis DoorDash Stock: Expensive Or Cheap? for more details on the company’s valuation.
[12/23/2020] Why DoorDash Stock Looks Expensive
Food delivery startup DoorDash (NYSE:DASH) went public earlier this month and saw its stock soar from its IPO price of about $102 to levels of around $160 currently, with its market cap standing at about $51 billion – making the company more valuable than major restaurants including Chipotle and Yum Brands. Is this valuation justified? While DoorDash has seen demand for its services soar through Covid-19, garnering roughly half the U.S. delivery market, we still think the company is quite overvalued at current levels, and estimate its fair value at closer to $90 per share. See our interactive analysis DoorDash Stock: Expensive Or Cheap? for more details on what’s driving our price estimate for the company and how its key metrics stack up versus peers. Parts of the analysis are summarized below.
How Does DoorDash Make Money?
DoorDash primarily makes money by charging restaurants a commission based on the total dollar order value and also charges a fee to consumers for using its platform. The company also generates revenue from membership fees paid by consumers for its subscription service – DashPass and by charging per-order fees to merchants that use its logistics to service orders under its Drive third party program. DoorDash’s Gross Order Value – or the total value of orders placed on its marketplace – grew from around $2.8 billion in 2018 to $8 billion in 2019. We expect it to rise to about $24 billion in 2020, as Covid-19 caused orders made on the platform to surge almost 3x over the first nine months of the year. The company’s Total Revenue has grown from around $0.3 billion in 2018 to about $0.9 billion in 2019 and is likely to jump to about $2.8 billion this year.
What’s DoorDash Worth?
We value DoorDash at about 10x projected 2020 Revenues, translating into a total valuation of about $28 billion or about $88 per share. While this multiple is well ahead of Grubhub (NYSE:GRUB), which trades at about 3.6x projected Revenue, and Uber (NYSE:UBER) which trades at around 7.1x, DoorDash justifies this multiple for a couple of reasons.
Firstly, growth has been much stronger, with Revenue on track to grow about 200% each year between 2018 and 2020. This compares to annual growth rates of about 34% for Uber, 85% for Lyft, and 39% for Grubhub over the last two years. Secondly, DoorDash has also cut its losses, as its Revenues have expanded much more quickly than its cost base. Operating Margin rose from about -72% in 2018 to levels of about -7% over the first nine months of 2020. In comparison, Grubhub and Uber still remain deeply lossmaking.
Moreover, DoorDash has innovated and has been quick to spot trends in the fast-growing delivery space. For instance, it doubled down on suburban markets – which typically have larger orders and lower costs compared to large cities translating into better profitability. It holds about 58% market share in the suburbs. DoorDash’s subscription program, DashPass, has also been a success, signing up about 5 million customers, or about 28% of the company’s estimated 18 million monthly users. In comparison, Uber’s subscription offering is used by less than 2% of its total base (both ride-hailing and food delivery).
What Are The Risks?
We think DoorDash’s current market price of about $160 per share (over 18x estimated 2020 Revenue) is too high for a couple of reasons. Firstly, it’s highly likely that the company’s era of hyper-growth is behind it. As highly effective Covid-19 vaccines have started to roll-out, the end of the pandemic – which is likely a once-in-a-lifetime event that helped delivery volumes – appears to be in sight. As people return to restaurants, demand for delivery could moderate, impacting Revenues and profits in the sector. Secondly, the delivery market is also intensely competitive and there is little to differentiate the major players other than delivering food at the lowest price possible. There are no real switching costs for users, who often use multiple apps. While DoorDash’s contracts with most of the largest U.S. restaurant brands and its subscription offering help it to an extent, it doesn’t fully mitigate the risks for the company.
While DoorrDash may have moved, 2020 has created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Central Garden & Pet vs. D.R. Horton shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.
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