Doordash (NYSE:DASH) hasn’t been able to escape the selloff in high-growth tech stocks. In fact, DASH stock’s gains have practically evaporated, falling more than 50% from the all-time high to the name’s recent low of $121.
Did the stock deserve this selloff? Unfortunately for the bulls, the answer is a resounding yes.
But is it a buying opportunity? Also unfortunately for bulls, the answer to that question is no.
That’s because the valuation for Doordash simply doesn’t make sense — not for the type of business it operates. Its industry is in a race to the bottom, a move that will ultimately decimate margins and cripple the weakest players.
Why You Should Avoid DASH Stock
Think about the food-delivery business. These companies are not all that different, essentially doing the same thing across the board. The goal is to get customers’ food to them quickly and accurately. Assuming each company can meet this need, the biggest differentiator usually comes down to price.
So, if Company A delivers from Andi’s Eats for a $10 fee while Company B delivers from the same place for $7, who are most customers going to choose?
This kind of prospect is going to kill the margins in this industry. On Wall Street, we call this a raise to zero.
That’s why it was a great idea for DASH stock to go public when did. Not to mention that it did so during a pandemic, when the food-delivery business was booming and many restaurants could not accommodate in-person dining.
This is clear from the company’s 226% revenue growth over the past one year. That’s impressive, but clearly driven by the pandemic. What’s actually impressive, though, are its revenue forecasts for this year and next year, which call for roughly 25% and 30% revenue growth respectively. However, at the same time, Doordash is not forecast to be profitable even with this surge in revenue.
While we’re talking about forecasts, though, we must also keep in mind that they’re just that: forecasts. I could see a scenario where the return to normal leaves Doordash underachieving on its revenue growth. But, I must admit, there is clearly demand for delivery.
That said, trading at 11.33 times forward price to sales (P/S) and commanding a market capitalization of $43 billion, DASH unfortunately just seems too rich, especially for a delivery company with $3.7 billion in expected sales this year.
Bottom Line on Doordash
I don’t want to sit here and begrudgingly cut down DASH stock for all eternity. At some point, this stock will have value. But right now, it’s just hard to look at Doordash and determine where that value is.
When we look at high-performance semiconductor companies, we see surging demand and limited supply. In other words, rising margins as secular growth drives the theme. With social media, we see traffic booming and ads commanding strong pricing.
With food delivery, it’s just not the same.
The most efficient way to gain market share is to undercut the competition on price. And while that grows the top line, it hurts the bottom line. Those kinds of businesses are difficult to like — especially when it’s hard to imagine a year as fruitful as 2020 moving forward.
At the peak of its decline, DASH was down just over 50% from the highs it made earlier this year. For many investors, a 50% tumble is at least enough to get them interested, particularly if they liked the stock beforehand and were waiting for a decline.
But that’s not the case here. The business and the valuation are hard to love and no one actually knows where DASH’s bottom is.
Plus, with the company now public, investors have to be cognizant that more supply can come to the float. In other words, lock-up expirations increase the number of shares that are traded and can negatively impact the price.
For now, DASH stock remains just below its 2020 low near $135. Bulls need to see the stock reclaim that mark and its short-term moving averages before it has a chance to restart a bullish trend. Until then, it could still be vulnerable. Keep an eye on the current low at $121.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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