DoorDash (NYSE:DASH), a restaurant and food delivery service, released its first-quarter numbers on May 5. Unfortunately, despite much higher revenue, its operations turned cash-flow negative. This means it is losing money even though its revenue is rising. That’s not an order for success for DASH stock.
Here is what happened. Revenue rose 35% year-over-year (YOY) to $1.456 billion, up from $1.077 billion last year. This was also up 12% on a quarter-over-quarter (QOQ) basis from $1.3 billion. That’s great.
The only problem is the net income losses grew from $110 million last year to $167 million in Q1 2022. More importantly, the company’s cash flow from operations (CFFO) fell from $166 million to a loss of $20 million. After deducting capital expenditures, free cash flow (FCF) fell from $134 million in Q1 2021 to a loss of $52 million in Q1 2022.
That is a huge swing over one year despite higher sales. That means DoorDash is digging itself into a hole. Right now, that is not going to hurt its cash balance very much. As of the end of March, it had $2.5 billion in cash and $1.25 billion in securities for a total of $3.75 billion. So a quarterly cash burn of $52 million won’t affect it much. On an annualized basis, this is $208 million, or just 5.55% of its total cash and securities.
But here is the issue. A company shouldn’t be making huge gains in revenue only to burn cash. That implies something is off. Its costs are rising, making operations unprofitable.
Investors have seen DASH stock fall 56.9% from the end of the year when it was at $148.90 to just $64.18 as of May 9. However, even from its peak at $245.97 on Nov. 12, the stock is down 73.9%.
However, it still has a whopping market capitalization of $22.54 billion. For a company that is burning cash, that is a huge market value. In fact, it represents more than 3.75 times its forecast sales this year of $6 billion. And keep in mind these are sales that will likely lead to losses for shareholders. For example, 18 analysts forecast an earnings per share (EPS) loss of $1.29 this year.
This implies the company could still be significantly overvalued unless it can turn its unprofitable operations around. The problem is its costs are out of control. Now, with higher wages and marketing expenses, pressures could be building. Moreover, management said on its conference call it is not trying to “harvest margins” while building market share. As a result, further losses are possible.
That does not bode well for DASH stock. It could fall to 2 times sales while the company builds market share. That represents a potential 46.7% drop from here. Investors should be careful with DASH stock as a result, as this could take it down to $34.21.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.