The DoorDash (NYSE:DASH) stock initial public offering blew expectations out of the water. Ther’e no question 2020 has been a huge year for DoorDash. But DASH stock is the latest in a string of tech IPOs leaving investors and analysts scratching their heads.
Throughout history, overenthusiastic investors have driven IPO stocks way too high as soon as they go public. DASH stock is a perfect example of this phenomenon. Regardless of what you think of DoorDash as a company, I wouldn’t touch the stock with a 10-foot pole at this point.
DASH Stock Valuation
DoorDash eventually priced its IPO shares at $102, well above the high end of its target range of between $90 and $95. That IPO price represented a valuation of $32.4 billion. When the stock started trading on the NYSE on Dec. 9, it opened up 80% at $180. At that level, DoorDash had a market cap of about $60 billion.
Since that first day of trading, the price of DASH stock has drifted back toward reality. However, at a price of around $160, DoorDash is still valued at more than $50 billion.
A $50 billion valuation is still stunning when you take a closer look at the company’s numbers. First off, DoorDash reported $1.9 billion in revenue and a net loss of $149 million in the first three quarters of 2020. At its current price, DASH stock trades at about 24.2 times sales. Food delivery pure-play competitor GrubHub (NYSE:GRUB) trades at just 3.9 times sales.
DASH investors will certainly rationalize that valuation by pointing to DoorDash’s spectacular growth, including 267% growth in the September 2020-ending quarter. But GrubHub’s growth last quarter wasn’t too shabby either, with sales up 53.3% from a year ago.
The biggest red flag for me when looking at DoorDash’s valuation is how badly both private investors and Wall Street banks supposedly got DoorDash so wrong. In June of 2020, six months before the DoorDash IPO, the company completed a private fundraising round that valued the company at just $16 billion.
The company’s Wall Street bank IPO underwriters also apparently underestimated the company’s market value by nearly 50%.
At this point, the question investors would be asking themselves is this one. Who is better at determining fair value for a stock? Is it retail investors whipped into an IPO buying frenzy or private equity investors and Wall Street bankers who value companies for a living?
Warren Buffett was once asked his thoughts about the Uber (NYSE:UBER) IPO. Uber was one of the most overhyped IPOs of 2019.
“The idea of saying the best place in the world I could put my money is something where all the selling incentives are there, commissions are higher, the animal spirits are rising, that that’s going to better than 1,000 other things I could buy where there is no similar enthusiasm … just doesn’t make any sense,” Buffett said.
Of course he is absolutely correct. High-profile tech IPOs have a horrendous track record in the year following their first day of trading. Uber stock is a great example. Despite all the hype, from May 9, 2019 to May 9, 2020, Uber stock dropped 21.1%.
Buy Uber Stock Instead
Back in 2019, I was telling investors to stay away from Uber stock. Today, I’d much rather own Uber than DASH stock.
The honeymoon period for Uber is over on Wall Street. Investors need to wait for the dust to settle on DoorDash in a similar fashion. The company has high expectations, an even higher valuation and a lockup expiration around the corner that could trigger significant insider selling.
Uber Eats is benefitting from all the same tailwinds as DoorDash. However, Uber stock trades at just 7.1 times sales, a 70% discount to DASH stock.
In addition, DoorDash’s food delivery business will face some extremely difficult year-over-year comps in 2021. As the nation gets vaccinated for the coronavirus, people will likely rely less on food delivery and go back to eating out. In other words, DoorDash’s growth is likely headed for a significant slowdown next year. Meanwhile, Uber’s mobility business could be a huge winner once Americans start going back out to bars, restaurants and events again.
I think Uber stock is far from the best investment in the market these days. But compared to DASH stock, Uber looks like the bargain of a lifetime heading into 2021.
On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.