2020 was a year of bombastic debuts at the stock market, but perhaps none more so than the food delivery app DoorDash (NYSE:DASH). Short-seller Citron deemed it one of the most outrageous IPOs of the year, and said DoorDash stock is worth only a fraction of its price.
DoorDash stock dropped 24.6% of its value since its debut. It seems that investors understand its true value amidst a vanishing novel coronavirus tailwind that lit a fire under it last year. Moreover, the company faces stiff competition from its peers, and it needs to raise its margins to become profitable.
Despite dropping roughly 25% of its value, the stock is trading almost 16 times forward sales. This is dumbfounding considering how its direct competitors in Uber (NYSE:UBER) and Grubhub (NYSE:GRUB) are trading at just 5 to 6 times their forward sales.
The stock has been on a negative streak for most of December, averaging at $157.5 per share from a high of $186 per share.
DoorDash stock is highly overvalued, without a moat, and operating in a stringent competitive environment.
Highly Competitive Environment
As mentioned before, one of the main problems with DoorDash’s business model is that there aren’t a lot of differentiating factors. Switching costs are low as there are several established players in its niche.
Additionally, its competitors are growing at a much quicker pace and have significantly better margins overall. The table above highlights how DoorDash is struggling with its operating and free cash flow margins. Its direct competitors in Grubhub and Uber have negative margins, but not to the same extent.
Another essential factor to consider is Covid-19 and its catalytic impact on the food delivery business.
With vaccine approvals, a significant portion of the company’s customer base would prefer to dine out. The cracks have begun to emerge as DoorDash’s exclusive customer base was down from 63% in the third quarter of 2019 to 53% in the same period last year.
Moreover, restaurants would also want to invest in their own delivery mechanism. Operating costs for restaurants from services such as DoorDash tend to eat away at least 10% to 25% of their revenue. Hence, with such a massive share, I expect restaurants to consider an in-house operation seriously.
Therefore, with an undifferentiated offering, it’s very difficult for DoorDash to have healthy margins. However, the company does need to think fast. It needs to stay abreast with the competition with such deplorable margins.
Outlandish Debut for DoorDash Stock
DoorDash debuted on the New York Stock Exchange at a whopping $182. Its first-day trading price represents a massive 78% gain over its IPO price of $102. The company sold more than 33 million shares in raising roughly $3.4 billion. It lists 317.7 outstanding shares after the offering but lists an additional 68.6 million shares through stock options and RSU awards.
One of the main reasons for its impressive debut is the stellar financial performance DoorDash posted during the past year. Covid-19 tailwinds helped it generate $1.9 billion in revenue in the nine months ended Sept. 30 compared to $587 million in the same period last year.
The company’s valuation, though, is ridiculous at this point considering how things are likely to change for the better with the vaccine. Citron believes that DoorDash stock is worth $40, roughly 72% lower than its current value. Moreover, DASH stock is trading at least 40% higher than its mean targets.
Bottom Line on DASH
DoorDash is operating in a hugely competitive business, where little wiggle room to expand margins. The company does little to differentiate itself from the pact, which is why its exclusive customer base is declining.
With the Covid-19 vaccines a reality, expect the pandemic-induced tailwinds to vanish in 2021.
Moreover, the company’s valuation is outlandish, and a massive pull-back is needed for investors to get excited about it.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
