When the 33 million share sale, or $3.4 billion worth of DASH stock, began trading, the $195.95 intra-day high will have rewarded traders.
That is, only the few whose orders were filled will have booked capital gains. For everyone else chasing the stock now, what happens?
DASH Stock Post-IPO
The excess buying momentum ignored DoorDash’s historical fundamentals.
In 2019 and in the nine months ended Sept. 30, the company posted revenue of $885 million and $1.9 billion, respectively. Markets are extrapolating a revenue growth rate of over 200% will continue indefinitely.
As shown in the chart, DoorDash has an overall score of 5/100, hurt by low growth compared to its peers. At a forward price-to-earnings ratio of above 100 times (valuation) and negative operating margin (efficiency), the stock is trading at levels detached from its fundamentals. The stock may not necessarily fall from these levels.
So long as buyers snap up the limited share float, it could still move higher. For example, Uber has a share float of 1.71 billion, compared to 189.9 million shares for DoorDash. So, Uber’s stock should have less volatility than Dash stock and is less likely to attract short-term speculators.
DoorDash raised lots of cash to fund its substantial investment plans. Its objective includes increasing consumer adoption and extending its leadership.
As those investments bear fruit, investors will watch for gross margins turning positive. This is accomplished by increasing its sale and improving operations. Higher sales and marketing activities, like promotions, will strengthen brand awareness and drive revenue growth.
DoorDash is counting on its local logistics platform sustaining its moat. The platform connects over 390,000 merchants and serves over 18 million customers. Investors should note that the company counts unique email addresses as a customer.
So, if a user has multiple email addresses, it counts the same customer multiple times. Still, as long as interactions between merchants and customers grow, the company’s revenue will increase. And the more activity there is the platform scales. Eventually, cost growth will slow but revenue does not, leading to future profits.
Risks to DASH Stock
Like all IPOs offering unattainable profits, DoorDash may never reach profitability. Furthermore, the pandemic will eventually end when governments distribute the coronavirus vaccine.
When restaurants open again, DoorDash’s revenue will fall. Competition from Uber, Postmates, and Waitr will heat up, pressuring DoorDash’s margins. Shareholders will need to weigh such risks before deciding to buy more shares at current levels.
The resiliency of the company’s moat is questionable, too. Customers could easily dismiss the convenience of the service. They could order directly from the restaurant, especially if that cuts the additional service delivery fees. Plus, restaurants could offer bigger discounts for direct orders, negating the need for DoorDash.
DoorDash is potentially another fad stock whose two-fold returns made headlines but the potential gains afterward are absent. If the stock market euphoria ends abruptly, speculators will want to sell this stock first to book the easy gains. They may seek value from there by buying restaurant stocks directly.
Conversely, unique restaurants may rely entirely on DoorDash’s platform. So, if customers are too attached to its service offering, the stock is reflecting a new paradigm of the restaurant and delivery market.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.