Dine-in restrictions due to Covid 19 have resulted in explosive growth for the food delivery industry. As a result, the third-party restaurant delivery service DoorDash (NYSE:DASH) stock has soared. DoorDash has seen its revenue almost triple in the fourth quarter.
The Covid 19-induced tailwinds are fading away, though, which points to a weak outlook. Despite the intense competition in the sector and challenges ahead, DASH stock is trading at an outrageous valuation.
DoorDash had its long-awaited IPO back in December last year. Its stock was initially priced at $102 on the first day before closing at a whopping $189. DASH reached an all-time high of $256 and is now down more than 35%, trading around $133.
Despite the massive drop in its value, its forward price to sales ratio is more than 11.5 times, 750% higher than the sector median.
Additionally, DASH trades at a forward price ratio of over 8000%. At these nosebleed levels, any investor should be wary.
Weak Outlook
The pandemic has been a boon for DoorDash. Its revenues grew 226% in the first nine months of 2020 compared to the same period in 2019. Still, the company reported a massive loss of $1.4 per share and doesn’t expect to be profitable before 2022.
However, the million-dollar question at this stage is whether it can sustain its market share and revenues in the post-pandemic world. It would be tough to imagine how it would generate the same returns when the economy reopens and people start dining out again.
With restaurants fully open take-out demand should fall off significantly. Plus, small restaurants may want to opt-out of costly delivery services.
Additionally, the $15-an-hour minimum wage is a priority for the Biden Administration. Should it be accomplished, it will further drive the company’s costs. I wouldn’t be surprised if there are lay-offs and a drop in delivery jobs. Such jobs will also be less attractive to employees, lowering the quality of the available labor force.
Lack of Value Addition
The food delivery industry is dominated by a few players who offer an undifferentiated service for the most part. Therefore, companies such as DoorDash must have the support of the vendors on their platform.
The problem is that the company offers very little to them and takes away a sizeable chunk, roughly 20% of each order placed on its platform.
At the same time, all its peers are offering the same service with similar charges. Therefore, there is little incentive for restaurants to list specifically on a particular platform. Additionally, some restaurants have also contemplated the creation of an in-house delivery service to expand their margins.
Margins are already slim for restaurants, and they are paying a hefty amount to enlist on the platform. DoorDash cannot afford to increase its fees anymore. If the restaurants have problems with the company’s services it’s likely to complicate things further.
Bottom Line on DASH Stock
DASH stock has performed exceptionally well during the pandemic, but it is unlikely to post such lofty growth numbers with the reopening of the economy.
Moreover, the intense competition in the industry will continue to lower margins. On top of that, restaurants might de-list from the platform to cut down on costs. Therefore, DASH stock offers little value to investors at its current price.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
