There’s a great deal to like about DoorDash (NYSE:DASH) stock at its current levels. Last year, the company’s top line improved significantly. And in the first nine months of last year, its operations generated positive cash flow, even factoring in stock-based compensation. Also positive for DASH stock is the fact that, after diving nearly 50% in the last three months, the shares’ valuation has come down to much more reasonable levels.
The company also has a few other positive drivers that should materialize in the longer term. Specifically, it should benefit from consolidation within the delivery sector and the increased prevalence of autonomous vehicles. DASH stock can also get a boost from its expansion to new end markets and new geographic regions, as well as reduced fear of the Federal Reserve’s policies.
On the other hand, DoorDash is likely to be hurt by the easing of the pandemic and could fall further due to renewed macro worries.
Positive Factors on the Balance Sheet
In the first nine months of 2021, DoorDash’s sales jumped to $3.59 billion, up from $1.92 billion during the same period in 2020. Even more impressively, DoorDash’s cash flow from operations was $525 million in the first nine months of 2021, up from $315 million in the same period in 2020.
Even excluding the $357 million of stock-based compensation (SBC) that DoorDash paid out between January 2021 and September 2021, it generated cash from its operations of $168 million.
That was well below the $304 million of cash from operations, excluding SBC, the firm reported in the first none months of 2020. Still, there were many more lockdowns in 2020 than in 2021, and costs rose for most businesses last year. The most important point is that, in the first nine months of 2021, DoorDash’s core business was profitable from a cash-flow standpoint.
On the valuation front, the enterprise-value-to-sales ratio of DASH stock, based on analysts’ average 2022 revenue estimate, is now roughly 7x. That’s not a very high valuation for a company that’s growing fairly rapidly and whose core business generated positive cash flow through the first nine months of last year.
Other Upbeat Catalysts for DASH Stock
As the pandemic eases, costs climb and lockdowns disappear, many, if not most, of DoorDash’s small competitors are likely to go out of business. And one of its major competitors, GrubHub, could be acquired by another large company in the sector. According to Bloomberg, GrubHub’s owner, Just Eat Takeaway (NASDAQ:GRUB), is considering selling the American food delivery company.
As the number of competitors in the delivery sector drops, it should become easier for DoorDash to charge merchants much higher fees. In the longer term, the proliferation of autonomous vehicles could greatly boost DoorDash’s top and bottom lines.
The day when many large merchants are ready to use autonomous vehicles may not be that far away. Walmart (NYSE:WMT), for example, recently began its first-ever multi-city test of such vehicles in partnership with Ford’s (NYSE:F) subsidiary, Argo.
Meanwhile, DoorDash continues to expand the number of companies aside from restaurants with which it’s partnering. At the end of the third quarter, DoorDash was collaborating with “over 40,000 non-restaurant stores.” As the company partners with retailers whose margins are much higher than those of restaurants, DoorDash’s own margins should climb meaningfully.
DoorDash is also expanding to new international markets. For example, it began operations in Japan last June. Eventually, the growth of the company’s overseas markets should meaningfully raise its top and bottom lines.
Turning to the macro picture, a lower-than-expected Q4 increase in U.S. wage costs and ambiguity surrounding the Fed’s interest rate hike seem to have calmed investors’ fears about buying growth stocks.
Negative Macro Catalysts
Conversely, DASH stock could be hurt by two macro trends. As I indicated earlier, the easing of the pandemic could slow DoorDash’s growth. Additionally, investors’ fears about growth stocks could potentially return.
As the omicron variant of Covid-19 eases and more people get vaccinated, it appears leaders around the world are becoming less worried about the pandemic in general. For example, the U.K. and Australia recently eliminated many anti-virus measures. Additionally, Chief Medical Advisor to the President Dr. Anthony Fauci said the outlook of the pandemic in the U.S. has become “good.”
As public health officials and politicians become less worried about the pandemic, consumers should follow suit. That trend, in turn, is likely to meaningfully lower the utilization of delivery services.
On the macro front, inflation could theoretically be higher than many expect in the coming months, causing the Fed to become more hawkish. That in turn could precipitate another big decline in growth names, including DASH stock.
The Bottom Line on DASH Stock
Over the long term, I believe that there’s an excellent chance DASH stock can climb significantly above its current levels as positive catalysts kick in. But there is a fairly high chance the easing of the pandemic and fears of higher interest rates could pull shares down in the short- to medium-term.
Consequently, I recommend long-term growth investors consider buying a small amount of the company’s shares on weakness within the next month or two. If the shares drop significantly in subsequent months, buying more of the stock could be a good idea for such investors.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.