Risk/Return is Not in Your Favor, So Avoid DoorDash Stock

After its recent IPO, you can say DoorDash (NYSE:DASH) stock is turning into a case of Main Street bulls versus Wall Street bears. That is to say, many may be interested in buying the food delivery company’s shares, given its novel coronavirus tailwinds.

DASH stock
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But citing valuation concerns, some investing professionals see it as an over-hyped stock to sell.

As of late, it seems the bears may be winning. Shares initially went parabolic after going public at $102 per share. But after hitting prices nearing $190 per share, the stock pulled back. Shares now change hands at around $160 per share.

Is further downside on the horizon, as we enter 2021? The jury’s still out. While there’s much to make a bear case with (rich valuation, high competition), investor enthusiasm for “hot stocks” could prevail. Retail investors on apps like Robinhood may again beat the professionals at their own game.

Yet, while the bears could be proven wrong, that alone shouldn’t convince you to buy DoorDash stock at today’s prices. With much of its future growth priced-in, it may be too late to cash in on this pandemic play.

Bull Case vs. Bear Case With DASH Stock

While many have knocked this stock, not everyone on Wall Street is bearish on DoorDash’s prospects. Susquehanna’s Shyam Patil takes a more positive view on shares, giving them a $185 per share price target. His rationale? Namely, the company’s large market share in the online food delivery market. Patil sees this as giving it an edge, despite the high competition in this fast-growing industry.

However, who’s to say this isn’t already reflected in the DoorDash’s current valuation? As I mentioned above, valuation is a key concern among the stock’s many bears. Yet, there’s much more to case made by the stock’s critics than mere hair splitting over a frothy multiple. Calling it the “most ridiculous IPO of 2020,” prominent short seller Citron Research gave the stock a $40 per share price target.

Beyond their valuation concerns, Citron cited its lack of economic moat, as well as the fact most of its high growth may have been a pandemic-driven one-time event. Once the “new normal” shifts back to the “old normal,” DoorDash itself expects its rate of growth to decline.

Citron makes many solid points in their detailed “short report.” It’s clear investors have gotten ahead of themselves, bidding up DASH stock to a “priced for perfection” valuation. But while there’s room for additional gains from here, said gains pale in comparison to the potential downside.

Additional Runway Fails to Counter Downside Risk

Valuation concerns may have many saying DASH stock is one to avoid. But there’s a pathway for this richly priced stock to head even higher in the coming months. Firstly, as InvestorPlace’s Mark Hake wrote Dec. 16, shares may not be overvalued when you factor in its growth prospects.

How so? Yes, at first glance, DoorDash trades at a substantial premium to its peers like Grubhub (NYSE:GRUB) and Uber Technologies (NYSE:UBER). But if high annual growth (30%+) continues, shares could continue to trend higher.

Secondly, as this Seeking Alpha commentator noted, the company could become consistently profitable within the next year or two. If its bottom line continues to swing towards positive earnings, investors may be willing to give company a much higher valuation.

As “growth at any price” remains the stock market’s mantra, I can see a pathway for DoorDash stock to continue performing well in 2021. But this bull case mostly hinges on continued investor euphoria. Recent trends could change course.

Investors have already started to cycle out of “pandemic plays,” and back into stocks hard-hit by the pandemic. With Covid-19 vaccine distribution kicking off, confidence we’ll “get back to normal” in 2021 will continue to rise.

That could be bad news for those buying DoorDash stock at today’s prices. I don’t see it cratering to Citron’s $40 per share price target. A continued pullback towards its IPO price of $102 per share could happen in the coming year.

Bottom Line: Skip Out on DoorDash

Those bearish on the food delivery app’s shares may be not giving it enough credit. While richly priced compared to peers, the company has much on its side to help it continue to thrive. If investor euphoria for growth stocks continues, there’s some room for additional gains for those buying DoorDash at today’s prices.

But consider the prospect of this year’s “growth at any price” mentality reversing course in 2021. Coupled with the vaccine getting us out of the woods with Covid-19, and the risk of losses buying this pandemic play today likely exceed its potential gains going forward.

Ride Wall Street’s coattails and avoid DASH stock.

On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.

Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.


Article printed from InvestorPlace Media, https://investorplace.com/2020/12/rick-return-not-favor-avoid-dash-stock/.

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