- DASH stock has fallen off the cliff as part of the broader sell-off of tech stocks
- Inflation will have a telling effect on the food delivery sector
- Path to profitability seems as muddled as ever
DoorDash (NYSE:DASH) and its peers saw their business soar during the pandemic. However, as the pandemic draws close and inflation pushes into high gear, the last-mile delivery market is in for a hammering. Industry stalwarts such as DoorDash are already feeling the heat from the accelerating inflation rates. The macro-economic headwinds will further accentuate the cracks in DoorDash’s business model, weighing down DASH stock.
Growth stocks, which benefited immensely from the stay-at-home economy, performed terribly in the market last year. Consequently, DASH stock shed more than 33% of its value in the past nine months. It now trades at over 50% lower than its 52-week high price of $257.25.
During the pandemic, most of the tailwinds have now turned into headwinds for companies such as DoorDash. As the business tackles the challenges of the post-pandemic world, rising interest rates and inflation will continue to cripple its stock market performance.
Pandemic Habits Will Be Crushed By Inflation
Consumers across the globe have been compelled in many ways to prioritize convenience over costs in the past couple of years. The food delivery business was a massive beneficiary of the trend, and some of the biggest names in the industry witnessed triple-digit growth in their top lines.
However, as Covid-19 concerns wane, the delivery boom will likely take a sizeable hit. Specifically, inflation will force consumers to re-think their spending habits and look to curb costs as much as possible.
Consumers are becoming more comfortable with dining out, and that trend will accelerate this year. Moreover, according to a recent Morning Consult survey, weekly online grocery orders are declining rapidly. Cooking behaviors have also evolved, as the share of at least one weekly cooked meal for consumers rose 4% from October last year to February.
Additionally, it’s also important to consider how many food delivery services are getting more expensive. Food inflation increases restaurants’ costs, which then impacts DoorDash’s profitability.
Most of DoorDash’s costs are variable, which is shown by the fact that its revenues and expenses increased by roughly the same amount at $2 billion last year. Thus, the company’s operational loss shot up by a hefty $16 million last year, despite a mammoth increase in sales.
Profitability Remains Elusive
It would be fair to say that DoorDash is coming off the best couple of years in history. The company enjoyed a tremendous market share at roughly 60% and quadrupled its sales figure by 2021. The stage was set for its business to turn a profit and prove the naysayers wrong finally. However, its operational expenses blew up in line with revenues, leaving little chance for a break-even scenario.
Operational margins improved substantially due to the abnormal increase in sales in the past couple of years. However, with the normalization of pandemic trends, its margins could potentially return to pre-pandemic levels. Its operating margin in 2019 was at a -70%. Despite the massive customer adoption rates, its razor-thin margins hamper its ability to profit on a large scale.
Interestingly, its founder and CEO Tony Xu raked in over $400 million in compensation in 2020. Its CEO is making millions at the expense of the company’s path to profitability. Growth without profitability is not a sustainable strategy; DoorDash needs to figure out how it can slash its operational costs to succeed long term.
Bottom Line On DASH Stock
DoorDash’s phenomenal performance in the past couple of years was not enough to turn a profit. Given the cessation of the pandemic-led tailwinds, it will be remarkably tough for the company to perform as it did recently and inch closer to profitability.
Inflation is likely to play a major role in its short-term growth trajectory. Moreover, the current macro-economic scenario might impact pandemic habits, which super-charged results for DoorDash and other food delivery companies.
DASH stock is in for a torrid time ahead, and regardless of the headwinds, it still trades over 6.5x forward sales. Despite the pullback, the stock is still trading at a lofty valuation, further adding to its bear case.
On the date of publication, Muslim Farooque 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.