DoorDash: Treating This High Growth Story With Caution (NASDAQ:DASH)

In a well-established food delivery industry, DoorDash, Inc. (NASDAQ:DASH) became the largest player in the US by staying away from saturated and competitive cities, focusing on suburban restaurants of which majority did not have an existing delivery offering in place. This recipe worked well, and the company saw 66% market share of the meal delivery market in December 2023.

It recently released its Q4 2023 earnings. The results were mixed, with the company missing its EPS expectations for the first time in four quarters. This comes despite a surge in its customer base and a 27% YoY increase in revenue. The company’s journey over the past decade has been marked by growth but not profitability. The stock lost 24.09% of its value since its IPO, and insider sell-offs have significantly increased over the last few months. While DoorDash has seen rapid growth through an innovative approach to delivery and aims to expand outside of food delivery, with a focus on its logistics capabilities. Overall, I believe there is an absence of a competitive moat. The company operates in a growing, albeit oversaturated market with low entry barriers and higher wage law challenges of all of which are contributing to its lack of profitability. Given these factors, it’s difficult to see why this stock would be an attractive buy. In light of these considerations, I recommend a hold rating.

Company overview

Founded in 2013 and going public at the end of 2020, DoorDash has shown impressive growth, in short space of timing become food delivery market leader. The company focused on popular suburban restaurants that did not deliver, realising that outside of New York City, 85% or restaurants in the US did not offer this service. Furthermore, it focused on the power of logistics, identifying customers, Dashers and restaurants to match at competitive and attractive prices for all the stakeholders involved. The company was also quick to establish a recurring subscription platform, its DashPass at $9.99 per month.

In its Q4 2023 earnings call, the CEO announced record numbers of merchants, consumers, and Dashers on the platform, outpacing industry growth. The company saw a 23% YoY increase in orders, reaching 574 million in Q4 2023, and hit a record of 37 million active monthly users in December 2023. DoorDash’s DashPlus and Wolt+ subscribers increased to 18 million users. Wolt+, part of the company’s international expansion efforts, is available in Europe and Japan. However, it’s worth noting that despite the increase in subscriptions, customer retention rates drop significantly after the first month of payment.

We can see that DoorDash has been increasing its market share within the competitive meal delivery market. Major players in the US are Uber Eats and Postmates, both owned by Uber (UBER). Another significant player is Grubhub which is owned by Just Eat Takeaway.com (OTCPK:JTKWY). The company took advantage of going public during the heat of the pandemic and the surge in demand for delivery services. However, it is also important to be aware that customers are not particularly loyal, as they are incentivised to switch amongst apps to get the better deal for their favourite food spots. Furthermore, we are seeing more blurring lines between retail, delivery and restaurants, in addition to dining in and eating out, which continues to increase the competitive nature of this space.

Future growth potential in the industry is through partnerships. DoorDash has partnerships with CVS as well as regional and national convenience stores for the delivery of household essentials. DoorDash also partnered with Albertsons to expand its grocery delivery offerings and reportedly engaged in talks to buy Instacart. In September 2021, DoorDash also announced that it was adding alcohol delivery to its app. More recently, in November 2023, it also added consumer electronics, by partnering with Best Buy. In 2024, the company plans further expansion into retail and grocery. This is a similar strategy to competitors in the market.

Financial overview

DoorDash is still a relatively young company that is showing us compelling top line growth, however we are still seeing deepening losses and increasing YoY expenses as the company grows which is concerning as we are not sure if the business is able to deliver profits.

One of the major attraction points towards the company is that it has a strong cash position. The company’s levered free cash flow was $1.45 billion TTM. This has been upward trending for the prior four financial years. This allows the company to reinvest in the business, pay off debts and reward investors. Furthermore, the company is sufficiently liquid with a current ratio of 1.64 and a quick ratio of 1.35. The company is repurchasing shares which can indicate confidence in the business. In 2023 it repurchased a total of 12.0 million shares at the total value of $750 million. Furthermore, it will continue to do this in the upcoming year announcing that it will repurchase a value of $1.1 billion of its stock.

Valuation

Over the last year, DoorDash has received a lot of positive feedback from recognised analysts. Based off an earnings report that had mixed result, majority of the analysts increased their price targets. We can see that Morgan Stanley increase its price target from $95 to $135, while RBC raised its target from $105 to $130. The company has been experiencing significant momentum, particularly when compared to its peers in the food delivery market.

Its stock performance over the past year has been impressive, with a price return of 85.20%. However, this positive market performance does not align with the company’s financial performance. While the revenue growth and strong cash flow stand out as attractive, I believe more emphasis should be put on the concerns with regards to rising expenses, the company’s continued lack of profitability if we look at GAAP results and poor customer retention rates.

While DoorDash has potential for growth through expanding its international presence and building innovative partnerships, it’s important to note that there is no unique aspect of this business model that sets it apart from its competitors or prevents it from being easily replicated. The company’s rapid growth and the speed at which customers have switched from alternative apps suggest that fierce competition could quickly erode the company’s growth potential. When examining its valuation relative to peers, it’s clear that the company as a not yet profitable company is relatively expensive compared to other players in the market. For instance, DoorDash’s valuation is higher than Uber’s, despite Uber having a broader market scope and already turning a profit. This is evident when comparing the companies’ price-to-sales ratios on a TTM basis, with DoorDash at 6.04 versus Uber’s 4.44.

Risks

DoorDash is currently facing a number of risks. One concern is that many insiders have sold off a large part of their shares. While this is not an issue in itself, it can be a concern as there is less alignment with the company and those that manage it.

Furthermore, the company is struggling with increasing operational expenses, notably in labour costs. This is particularly challenging given the nature of the food delivery industry, which is characterised by low entry barriers, little customer loyalty and many competitively priced alternatives. While the food delivery sector is growing, there is also apparent saturation, which is intensifying competition and making customer acquisition increasingly difficult. DoorDash is focused on broadening its services and entering new markets, however these efforts require investments and there is always the risk of failure. Another potential risk is disruptions in the supply chain, which could prevent DoorDash’s order fulfilment capabilities and impact customer satisfaction, which could have an impact on the overall performance.

Final thoughts

While DoorDash’s growth story has been an exciting one to watch and the company has been well received on the stock market over the last year. There is the fear that the business journey will be similar to that of many tech companies, which see rapid growth, but due to high competition, relatively easy barriers of entry and a lack of a major competitive edge the company’s ability to stay relevant and become profitable is unclear. Despite impressive growth and a surge in its customer base, the company’s path to profitability remains uncertain due to an oversaturated market, low entry barriers and stricter wage laws. Given these factors, the stock’s attractiveness is questionable. Therefore, a hold rating seems appropriate at this time.