DoorDash (NYSE:DASH) is not the kind of stock I’d typically recommend. The company is unprofitable, DoorDash stock looks expensive, and there are legitimate questions about the business model.
And indeed, I’m not ready to recommend DASH stock — yet. But one of the red flags with the bear case is precisely that it is so simple. A 365-times forward price-to-earnings multiple looks close to absurd. So does a $49 billion market capitalization for a business that is facing a number of rivals and doesn’t seem to have much in the way of enduring competitive advantages.
But in investing, the simple case is not always, or even often, the correct case. At the least, even skeptics should consider the bullish view. A closer look reveals that view has more substance than might be expected.
A Good Business
One thing worth noting with DoorDash is that it seems like an awfully good business. And in this market, that’s been more than enough to offset any valuation concerns.
Competition is stiff, with Uber (NYSE:UBER) and Grubhub (NYSE:GRUB) the two biggest rivals. But of late competition hasn’t slowed DoorDash much, if at all.
In 2019, DoorDash revenue more than tripled. Growth then actually accelerated in the first three quarters of 2020 to 226% year-over-year. Obviously, the novel coronavirus pandemic was a big factor, but peers did not keep pace. Uber’s delivery revenue came just shy of doubling in the first three quarters of 2020. Grubhub’s total revenue rose 36%.
The relative outperformance wouldn’t be that impressive if DoorDash had begun as a smaller player. It didn’t. Rather, it simply lapped the competition. Market share now is estimated at 53%.
Increasing share in a growing market has been the path to upside for most of the best stocks in recent years. DoorDash is following that path right now. Going forward, meanwhile, there’s an obvious opportunity to expand beyond the current focus on restaurants to e-commerce, essentials, and other categories.
Put simply, DoorDash stock looks like an awful lot of big winners of late.
Valuation Can Work
Like those winners, DASH looks awfully expensive, particularly relative to near-term metrics. But the valuation here might not be quite as onerous as headline multiples suggest.
Those multiples are hefty. Again, DASH trades at 365x next year’s consensus EPS estimate. The revenue multiple clears 13x.
Neither is necessarily out of line, however. Earnings are going to grow sharply off a low base, particularly with 2021 net margins estimated to come in below 4%. A platform business like DoorDash also sees significant margin expansion following revenue growth, as incremental revenue is far more profitable. DoorDash’s gross margins at the moment are only about 50%, and that figure should see some expansion over time.
Obviously, DoorDash stock isn’t a value play, or anything close. But there is a path for the company to grow into the valuation, even with revenue growth likely to decelerate in 2021 and 2022 as some semblance of normalcy returns.
The Case Against DoorDash Stock
And so, I don’t think DoorDash stock should necessarily be written off as yet another sign of a bubble. The question is whether that’s enough to turn bullish.
On that front, I still see some problems. Regulatory risk is one key factor. DoorDash and other “gig economy” companies scored a big win with California’s Proposition 22 in November. But there will be pushes in other states for drivers to be treated as employees, rather than independent contractors, a shift which would dramatically reduce DoorDash profit margins.
Politics aside, there’s still the question of whether the delivery model actually works. Its success so far has come largely because private and public investors have been willing to shoulder significant losses driven by promotional spending and (likely) below-market rates.
Yet driver pay still is low, with estimated average hourly wages as low as $1.45 (yes, one dollar and forty-five cents) by one accounting. Restaurants don’t make out particularly well. And DoorDash itself isn’t yet profitable on a net basis. Even the 43 cents per share in earnings Wall Street expects in 2021 excludes hundreds of millions of dollars in stock-based compensation.
There’s even a near-term worry. As I noted relative to 2020’s other big initial public offering, Airbnb (NASDAQ:ABNB), the largest IPOs have struggled in the first year or two of trading. The likes of Snowflake (NYSE:SNOW) might suggest that this time is different, but DoorDash itself skidded south following a first day ‘pop’ before regaining ground in recent sessions.
For these reasons, I’m not quite there yet when it comes to DoorDash stock. But I’m more open to the stock, particularly with a further pullback, than I am to other dearly valued growth names in this market. There is a real case for DASH stock.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.
