I’m not the kind of investor who will dismiss Doordash (NYSE:DASH) simply because Doordash stock is too expensive. I’m more than willing to pay a premium for the market’s best stories.
However, the problem with DASH is that I’m not convinced it is one of the market’s best stories. For one, the competition is intense. Plus, the industry still hasn’t proved it can be all that profitable — and it might never be able to do so.
Simply put, there are risks here. At the right price, I might be willing to take on those risks. But after a massive pop following its initial public offering (IPO) earlier this month, I don’t believe Doordash stock is trading anywhere near the right price.
Doordash Stock and the IPO Pop
On its first day of trading on Dec. 9, Doordash stock rose nearly 86% from its IPO price of $102. But even that single-day gain underestimates how fast Doordash’s valuation moved.
After all, that $102 price was raised — twice. The company had originally targeted a pricing range between $75 and $85, then upped it to between $90 and $95.
Since its first-day close, though, DASH stock has pulled back about 26%. That’s brought valuation in somewhat. But the stock still trades at almost double the low end of that original range.
And, with a market capitalization of more than $44 billion, Doordash is now valued practically triple the $15 billion at which it raised capital back in June.
It’s difficult to justify that kind of move. Of course, the novel coronavirus pandemic has been a boon to delivery services. However, that tailwind was already known six months ago. So, not enough seems to have changed to support such a massive increase in the company’s market value.
Business Model Questions
Now, to be fair, we’ve seen plenty of stocks make big moves this year. Some of those moves have been well-deserved. At least in my opinion, investors have been a bit slow to perceive the size of the some of the megatrends on the way in coming years.
So, I’m not going to write off Doordash stock just because it has soared. But the problem with the gains is that I don’t see the end market as all that attractive.
To this day, no one has proven that the third-party delivery model is sustainably profitable. Doordash itself has posted positive adjusted EBITDA. But that figure excludes a ton of very real costs, including stock-based compensation.
Those profits also have come amid the pandemic, which has provided a massive boost to revenue and minimized consumer focus on fees. It’s a lot easier to swallow the platform’s high fees when there’s little practical alternative. Struggling restaurant operators aren’t likely to choose this time to push back, either.
Basically, at the very least, Doordash and its industry still have a lot to prove. And it’s hard to see that risk priced into a market cap of $45 billion.
Competition for Doordash
Finally, even if the industry has potential, Doordash won’t have the market to itself. Competition is going to be stiff. In fact, it already is — the company’s revenue year-to-date (YTD) pales in comparison to its largest competitors.
The competitive problem isn’t just a matter of revenue, either. The point of platform businesses like Doordash is that they usually are “winner take most.”
Winner take most markets are attractive from a long-term perspective because, at some point, profit margins will be large — and potentially enormous. In these cases, businesses like Doordash might look expensive in the near term because of the cost of acquiring customers and a reluctance to take pricing. But investors rightly focus on the longer-term potential.
However, Doordash has the valuation of a platform company without having the market share. On top of that, it’s also not likely to get to the point where it can take pricing and benefit from high incremental margins.
Again, at the right share price that’s all fine — the company isn’t worth zero. But Doordash stock costs in the same ballpark of other platform businesses with simpler paths to massive market share and huge margins.
That’s the core problem here, even with the pullback since the first-day pop. DASH is priced as something that it isn’t. That was true after the first day of trading and it’s still true now.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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