It seems like the time of the unicorns ended with the attempted initial public offering of WeWork. The cracks started in 2019 after Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) finally came public. But then the debacle really happened after WeWork’s IPO failed. The unicorns lost their mojo for now. Since then we’ve had a few but they did not capture headlines. DoorDash (NYSE:Dash) stock became public and like its ancestors, it too stumbled out of the gate.
Early equity holders suffered tremendous losses since its December introduction. DASH stock is now 30% below its birthday highs. Today we will evaluate if this is an opportunity to accumulate shares for the long term.
Catching falling knives is a tricky proposition under normal circumstances. Doing it in a stock this volatile is extremely dangerous.
When momentum stocks like these fall they resemble machetes, not knives. They have tiny handles and large blades, so catching them can cost us fingers. Of course, this is figuratively speaking to illustrate the level of caution that comes with today’s outlook.
DASH Stock Is Consolidating
There is some good news for the bulls. Since March, it has stabilized into a lateral consolidation zone. If I squint, I can even see a slight higher-low trend.
Meanwhile, the stock continues to set lower highs, which is fine. The goal is to stop making new lows, then face the descending trend into a showdown. This should happen in the next few weeks around $130 per share. If the bulls hold the line below, then they can start chipping away at the resistance above.
So far we’ve discussed only technical aspects of the DASH stock chart. The fundamentals are strong. Yes, they still lose a lot of money, but they are delivering exponential growth. They started in 2018 with $300 million in total revenue. By 2019 they were up to almost $900 million. Last year’s revenue for DoorDash was almost $3 billion. Clearly they are doing something right.
Critics could argue that the novel coronavirus pandemic helped. I don’t disagree, but so what? Regardless of the reason, the company gained a huge increase in user counts. These are habits likely to continue going forward. I am one who had never used them before and now they are part of my repertoire. A lot of our new habits that we developed last year will stick around for a long while.
There’s no doubt that it’s convenient to use services from the gig economy. It’s not a fad and it’s the way forward.
Restaurants also love it because they can run skeleton crews. Smart operators figured out that the bad pandemic predicament was actually constructive for the profit-and-loss statement. The net metrics improved for those who are able to operate. DoorDash-like services are too valuable to fade.
Perception Matters a Bunch
Expectations is where most of the problems arise for the stocks. That is why often companies report strong earnings but the stock falls. It’s usually because the investors set their expectations too high. This risk is not a concern for DASH because the price-to-sales is only 14. Its investors are realistic as this is in line with mega-cap tech companies. Tesla (NASDAQ:TSLA) is about 10 points more expensive for an absolute comparison.
I’m not making the argument that the stock is cheap because it’s not. But having a low price-to-sales means that most of the disappointment is already evident in the chart. What has been bad news so far, is optimism for new investors. Conversely, those who have not capitulated yet should wait to see how strong the $124 zone is for the next few weeks.
Go Against the Grain
I like it when hardly anyone likes a stock. Dash has had its enemies from the get-go. Straight out of the gate, Citron called it ridiculous. The ledge that those comments created on the chart continue to play a role. Most recently, this happened on Feb. 8 and around Feb. 23.
Wall Street investors are trading memes this year. It’s a dangerous game when they also ignore everything else. At some point logic kicks in, and this is the best thesis I have for DASH stock. The level of stock pain should taper off and revert to growth. Bottoming is a process so it’s best to avoid a V-shape recovery.
There is extrinsic risk from the markets being at all time highs. I,f for whatever reason, the indices correct, it would take DASH stock down with it. Therefore, as much as I like the upside potential, I should be realistic with the size. Going all in is reckless at this point. It’s a good idea to leave room for error or use options. There I can get long on the stock and leave more than 20% room for error.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
