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Avoid DoorDash Stock Unless You Can Handle the Pressure

The novel coronavirus pandemic accelerated the development of countless preexisting trends. Key among them was the rise in food-delivery app usage. Only the acceleration this year was less about pure convenience and more due to indoor dining restrictions. As such, it should be no surprise that the DoorDash (NYSE:DASH) initial public offering (IPO) — and DASH stock — quickly became the hot new topic on investors’ minds earlier this month … for a day or two.

Close up of Doordash logo and symbol displayed at the entrance to one of their offices

Source: Sundry Photography / Shutterstock.com

While there was plenty of hype heading into the IPO, DASH stock is now down about 16% since its debut on Dec. 9.

On the surface, that dip hardly means much despite it being double digits. DASH’s lifespan on the market is only six days. With the way things have been going this year, erratic jumps and tumbles like this are, sadly, expected. That’s especially true with a heavily hyped household name like DoorDash. It’s also just the nature of the beast with many IPOs.

It’s certainly too soon to say that DASH stock is DOA. However, the quick leap and subsequent dip highlight a potential challenge for the stock.

Setting Realistic Expectations for DASH Stock

While there have been countless hype beasts powering higher on the market this year, it seems like investors are taking the cautious route with DASH. And rightfully so.

Some of the generic theses behind DoorDash seem impenetrable. But when you take a closer look, the company has its fair share of issues that cannot be ignored.

Yes, it seems like the pandemic might have bolstered Dash’s success this year and set it up for a future filled with stacks of dollar bills. After all, the top four food delivery companies — including DASH — “raked in roughly $5.5 billion in combined revenue from April through September, more than twice as much as their combined $2.5 billion in revenue during the same period last year.” But, sadly, when it comes to DASH stock, things aren’t that simple.

Breaking down the evolution of the food delivery business, InvestorPlace market analyst Thomas Yeung explains:

“With revenues now split three ways (to the restaurant, driver and app), profits plummeted … And in the past nine months, DASH made money on an adjusted basis. But it took a pandemic to make it happen.

Although the pandemic has given DoorDash and its rivals like GrubHub (NYSE:GRUB) a promising boost this year, the core challenges to its business — the three-way split outlined by Yeung — still exist. And that’s not the only concern.

Is DoorDash Already Overvalued?

Analyst sentiment is another reason why DASH stock is suffering despite having debuted just a few days ago. Specifically, D.A. Davidson analyst Tom White downgraded the stock from buy to neutral on Dec. 14. He cited that “the stock’s current valuation appears to leave little room for any performance hiccups … White also reduced his revenue estimates for 2021 and 2022 by about 10% to reflect how the broad deployment of coronavirus vaccines could limit demand for food deliveries.”

Although the downgrade by White is DoorDash’s first analyst downgrade, he’s echoing valuation concerns other analysts have expressed both before and after its IPO. As Yeung explained right before the madness ensued: “Considering market share, DoorDash should be worth just $17.6 billion compared to Grubhub, or only $46 per share. That means DoorDash MUST keep growth high to maintain its premium valuation over Grubhub or risk having Wall Street re-rate its shares.”

Ultimately, there are a lot of risks involved with buying DASH stock right now. While it seems like the pandemic has set the company up for success in the “new normal,” a closer look suggests something different. There are many challenges ahead for the company. Such challenges include its numerous competitors like Grubhub and Uber (NYSE:UBER) gaining market share and the revenue “split” its current business operates under. And much of its pandemic boost might not last beyond 2021 once people start dinning indoors again.

As such, DoorDash is under significant pressure to perform at a high level. Any lackluster earnings report could quickly turn DoorDash into a falling knife that — obviously — shouldn’t be caught. Only risk-friendly investors should consider it a buy. Anyone else should keep a close eye and hold off until valuation concerns start to diminish.

On the date of publication, the author responsible for this article did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Article printed from InvestorPlace Media, https://investorplace.com/2020/12/avoid-dash-stock-unless-you-can-handle-the-pressure/.

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