DoorDash Inc (NYSE:DASH) may not even be overvalued, even after its dazzling IPO performance last week. DASH stock ended last week at $175 and had a market capitalization of $55.6 billion, after raising $3.366 billion for the company at $102 per share.
This is based on 317.656 million shares now outstanding, from page 16 of the IPO prospectus. Therefore, DASH stock ended the week up 71.5% from the IPO price. But although the stock may seem significantly overvalued, there is a way that it can be seen as reasonable.
This makes one wonder, what the hell were the underwriters thinking? Either they undervalued the stock at the IPO price purposely or the market for this kind of stock is now out of control.
For example, the company made just $1.9 billion in revenue for the first nine months of 2020. Let’s be generous and assume that this puts it on a run-rate of $3 billion in revenue for 2020. That means DASH stock trades for 18.5x revenue. That is revenue, not profits.
This ratio level is high even for earnings. But in today’s stock market 18 to 20x revenue for a fast-growing company seems to be the norm.
Moreover, analysts surveyed by Seeking Alpha have written reports that estimate that 2021 sales will be $4.1 billion. That implies revenue growth of over 40% for 2021. It also lowers the price-sales multiple to 13.6x.
What’s more, the enterprise value (EV) ratio is even lower. For example, with the $3.366 billion capital raise, DoorDash will have $4.886 billion in cash on its balance sheet.
Therefore, in order to derive the stock’s EV after the IPO, we deduct this cash from the $55.589 billion market cap. That gives DoorDash an effective EV now of just $50.7 billion. This, in turn, brings the 2021 forecast EV-sales ratio to just 12.36x.
The problem is this is too high a valuation from most standpoints. For example, its peers in the food delivery business have lower EV-to-revenue valuations. Grubhub (NYSE:GRUB) trades for just 3.2x price-sales for 2021. That is one-third of the valuation for DASH stock. Even Uber Technologies (NYSE:UBER), which owns UberEats, trades at 5x 2021 sales, less than half of DASH stock.
Comparison With Square
Moreover, even if we look at Square (NYSE:SQ), which has a similar business model the valuation seems extended. Both companies take a percentage of gross revenue volume (i.e., sales orders) as the determinant of a large portion of their net revenue.
For example, Square has a market value of $97.7 billion. But it has $12 billion in forecast sales for 2021. That puts it at about 8x 2021 sales.
Compare this to DoorDash. Its market value is $55.6 billion, 56.9% of Square’s, whereas its 2021 forecast revenue of $4.1 billion is one-third of Square’s.
In other words, using Square’s valuation as the yardstick, DoorDash should have a market cap of no more than $33 billion or so. That is $22.6 billion lower than DASH stock’s $55.6 billion value, or 40.6% lower.
That implies that on a fair value basis, using the most liberal yardstick, DASH stock is worth not more than $105. That’s close to its $102 IPO price.
So why is DASH stock so high now?
What’s Next for DASH Stock
Clearly investors in DASH stock at the prices it is trading at now are taking a much longer view on the company. they may be projecting out further than even five years.
For example, let’s assume that the company can make an average growth of 30% annual sales growth over the next five years. That would make revenue 3.71x its present $3 billion revenue base in 2020, or $11 billion.
That is close to Square’s $12 billion 2021 estimated sales. Therefore in five years, investors might be assuming DoorDash will have a $100 billion valuation just like Square has now.
Looking at DASH stock from this standpoint, it means that the stock can be assumed to almost double (81.8%) over the next five years (i.e. from $55 billion to $100 billion in value).
That also means that at current prices, investors could expect to make 12.7% annually over the next five years. That is the compound annual return one makes with a gain of 81.8% over the next five years. Moreover, if DoorDash’s sales grow more than 30% annually over the next five years, the stock could move even higher.
Therefore, for patient investors, today’s price for DASH stock might not be as unreasonable as one would think.
On the date of publication, Mark R. Hake had a long position in Square (SQ) stock.