When DoorDash (NYSE:DASH) went public on Dec. 8, the shares spiked by 85.5% — and this came after the price range was boosted. DASH stock would then go from $158 to $195.
But since them, things have cooled down somewhat. Note that DASH stock is now trading back to $158.
Founded in October 2012, DoorDash is the leader in providing delivery of food from restaurants. The company has more than 390,000 merchants, 18 million customers and one million Dashers. The market share is roughly 50% in the U.S. market.
The growth has certainly been torrid. For the first nine months of this year, the revenues jumped from $587 million to $1.92 billion. The company has also been generating robust cash flows.
But for DASH stock, what can we expect now? What are the prospects for the new year? Well, I actually think we’ll see more volatility. In fact, it is probably best for investors to be wary of the stock. There are considerable risks.
And let’s take a look at three:
Valuation Is off the Charts
OK, it’s true that investors haven’t been concerned about high valuations lately. This is especially the case for growth companies.
But this attitude could change quickly. The classic case is the dot-com era. There was a mania for internet companies – but then things suddenly went bearish. This meant huge losses for investors.
As for DASH stock, it could be particularly vulnerable if growth stocks go out-of-favor. Keep in mind that it is one of the more expensive tech stocks, with the price-to-sales multiple at a nose-bleed 19.5X. By comparison, Uber (NYSE:UBER) is at 7X and GrubHub (NYSE:GRUB) is at 3.9X.
Something else that should raise alarm bells is the discrepancy between private and public valuations. When DoorDash raised $400 million in June, the valuation from venture capitalists was $16 billion. But as a public company, the market capitalization is at a hefty $50 billion.
Seriously, why the disconnect? There’s not much actually.
Competition and DASH Stock
Even though there has been consolidation in the online food delivery space, the competition is still intense. DoorDash has to compete against tough rivals like UberEats and GrubHub.
According to Citron Research:
“There is no business that is more commoditized and competitive than having food delivered from the restaurant to your home. There is zero differentiation between Uber Eats, Postmates, Caviar, Grubhub, DoorDash, or any local provider. Even worse, this business model has no brand loyalty as the consumer just picks who will deliver their food for the cheapest price.”
The price target Citron has placed on DASH stock? It’s an awful $40. Note that the title of the research report was “The Most Ridiculous IPO of 2020.”
Granted, this may prove to be a worst-case scenario. But Citron’s analysis seems to be a succinct evaluation of the challenges of the food-delivery market.
Covid-19 Factor and DoorDash Stock
The pandemic has definitely boosted demand for DoorDash. Many restaurants have had little choice but to offer online delivery to deal with the stay-at-home orders and limitations on indoor capacity.
Given this, how important will it be for people to get food delivery? Probably not as much. Let’s face it, there will be pent-up demand for people to go to restaurants. Restaurants may also be less inclined to use services like DoorDash because of the high commission costs.
In other words, there could easily be a deceleration in the growth ramp next year – which could make DASH stock susceptible on the downside, especially given that the valuation is priced for near perfection.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.