One day, DoorDash (NYSE:DASH) is likely going to tumble severely. At least, that’s my take on this name. Right now DoorDash stock simply commands too high of a valuation.
It has a great concept — food delivery from consumers’ favorite restaurants — and it’s wildly convenient. So it’s no wonder the company opted to sell its shares to the public. However, I simply cannot justify paying such a high premium for DoorDash stock.
In the last several months of 2020, the IPO and SPAC space has really erupted. SPAC offerings have raised more in 2020 than in the past ten years…combined. Airbnb (NASDAQ:ABNB) went public with much fanfare, too, just days after DoorDash’s IPO in December.
I don’t think the market has reached a point of euphoria, but I believe there are pockets of euphoria in the market. Maybe that’s because of low interest rates and the Fed. Perhaps it’s due to rising speculation among investors.
Regardless, let’s look more closely at DoorDash stock.
Avoid DoorDash Stock for Now
I won’t say that DoorDash will never be a buy for me. My thesis can always change, and I am open to that possibility. But I would never buy the stock at these prices.
Similar to Airbnb, the demand for DoorDash’s stock simply outweighed the number of shares available. DoorDash planned to offer 33 million shares for $75 to $85 per share. It then raised that range to $90 to $95. Finally, the shares priced for $102 per share, a 27.5% increase from the midpoint of the initial range.
But even that wasn’t close to high enough. DoorDash stock opened at $182 per share, up 78% from its elevated IPO price.
Why would investors want to jump on something that is so unrewarding? The opportunity in DoorDash stock was between $80 and $102, not at $150-plus. The market seems to feel the same way. The shares fell for the next six sessions after the IPO and in 12 of the next 16 sessions.
Even so, the valuation doesn’t make much sense to me. I can’t imagine how buyers on the first day of the IPO were justifying a $60 billion valuation, and I still don’t know how bulls are justifying a $45 billion market capitalization.
Perhaps it’s the usual suspects driving the IPO: a small trading float in which demand continues to outpace supply for the first several months or even the first several quarters of trading.
Whatever the justification, 15.5 times this year’s revenue estimate doesn’t have me very hungry for DoorDash. Almost 12 times next year’s average sales estimate isn’t very enticing either. Although analysts, on average, expect DoorDash’s sales to surge 33% in 2021 to $3.8 billion, the stock’s valuation is simply unattractive.
Looking at the Bigger Picture
To be clear, I don’t mind paying a premium for a stock that deserves it. DoorDash’s growth outlook is good, but I don’t know about great. That is, unless the company’s 30% growth can be maintained for several years.
However, I look for strong margins in a sustainable field, and food delivery just doesn’t cut it.
I see a field that is benefiting from elevated short-term demand due to the novel coronavirus. While this trend was obviously in place before Covid-19, I have doubts about its sustainability once the world returns to a state of normalcy. I don’t have those same concerns about streaming video, for example.
Not many people are going to say, “you know what, I’d rather pay more and go back to cable.” However, many will now go back to their favorite restaurants, not just for the social element, but because eating out costs less than delivery.
Further, there is serious competition in this space. Between Uber’s (NYSE:UBER) Delivery (formerly Uber Eats) and DoorDash, the two control over 60% market share. But then PostMates and GrubHub (NYSE:GRUB) are in the mix as well.
Usually with increased competition comes margin pressure, although DoorDash’s operating margins climbed slightly from 2018 to 2019. In 2020, they jumped considerably, but I think that was due to the pandemic and, therefore I do not believe the increase is sustainable.
The Bottom Line
Uber Delivery has generated more than $3 billion of revenue in the first three quarters of this year. Based on that performance, Uber is either undervalued or DoorDash stock is overvalued.
At the end of the day, I find it too hard to picture DoorDash stock going from a roughly $45 billion valuation to a $100 billion valuation, and that’s what I would need to expect to be interested in a new-issue growth stock.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.