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Is DoorDash Stock a buy?




Former outsider By Dash (NYSE: DASH) may have achieved top dog status in record time. According to the company, it had only 17% of the delivery market in January 2018. By October 2020, its market share had grown to 50%. This rapid rise is one of the main reasons why investors love this stock so much.

The demand for DoorDash stock has been epic. The company originally planned to price its initial public offering (IPO) at between $ 75 and $ 85 per share, but the IPO was eventually pegged at $ 102 before its first day of trading took it to nearly $ 190. At the time of this writing, stocks are trading at around $ 200 per share.

In the first three quarters of 2020, DoorDash recorded a net loss of $ 149 million. But investors seem indifferent to these large losses, as they are ready to envision the company as the first delivery logistics network with wide application globally. There is merit to this thesis, but there are also good reasons to temper this rosy outlook with realistic expectations.

A man thinks while holding a pencil and a pad of paper.

Image source: Getty Images.

The case of DoorDash

In the first three quarters of 2020, revenue grew more than 200% year over year to reach $ 1.92 billion. Unimpressed critics say COVID-19 has spurred industry growth, which is true. But DoorDash has also increased revenue by nearly tripling its market share in less than two years. Peers include first come Grubhub and the most diverse Uber. Give DoorDash credit for winning business from powerful players like these.

He wins thanks to his counterintuitive decision to focus on smaller markets. Now, with more than half of the global market, it is in an enviable position. The wider availability of DoorDash increases its appeal to consumers, which in turn attracts more third-party delivery drivers (“Dashers”) to the platform. After all, a higher volume of orders means less downtime and higher earning potential for them.

With its scale improving and a horde of Dashers waiting, DoorDash has greater leverage for its platform. The company sees itself as a full delivery logistics network – something like this could disrupt grocery, pharmacy, and last mile delivery in the United States and beyond.

This vision will not happen overnight, but I applaud the long-term thinking of the company and its investors. If there is a global logistics network, DoorDash is positioned like any other player in the space.

Temper expectations

I love platform companies (Etsy and Airbnb are great examples), because they don’t actually have a physical product. They are simply platforms connecting two independent parties (although some provide ancillary services). As such, the profit margins are extremely high. They also benefit from a network effect. For example, more buyers at Etsy will attract more sellers, and vice versa. Plus, since these platforms are digital, they scale extremely well – you build it once and sell it over and over again.

DoorDash is a platform company, but it also lacks some of the key advantages. This is because there is a third crucial element in its equation. Most platform companies just worry about the buyer and seller, but DoorDash has Dashers operating in the middle, which makes the overall economy of this business much harder.

Management admitted (indirectly) that the Dashers are a problem. When companies file a claim with the Securities and Exchange Commission, they are required to list the perceived risks. When DoorDash signed up to go public, it said developing autonomous delivery vehicles or drones could dramatically improve its cost structure. The risk is not to do it.

In other words, DoorDash recognizes that its business model needs to be improved, and replacing Dashers with drones or self-driving cars is an answer. However, one of its competitive advantages is precisely its network of third-party drivers. If technology replaces Dashers, the moat could erode as companies with more experience in these technologies step in. Amazon and Uber are listed as competitors in this scenario.

A man delivers food to a woman.

Image source: Getty Images.

Is this a purchase?

DoorDash could improve the cost structure in other ways. For example, its DashPass subscription service can make its platform stickier, reducing sales and marketing expenses. Or the business could start generating revenue through higher margin ancillary services like in-app advertising to improve bottom lines.

There are profitable opportunities, but investors pay now for unproven opportunities. The stock is currently trading for a price / sell ratio of 29. In contrast, Grubhub is much cheaper, trading at less than four times revenue. These are the things that keep me on the sidelines with the DoorDash stock.

In the long run, the economy of this company must improve. Perhaps the stock can continue to rise in the short to medium term as the company continues to gain market share. But looking further, profits are necessary to create sustainable shareholder value.

Investors will have a better picture of DoorDash’s future when it releases its quarterly results on February 25 after the market closes.

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