2023-11-13 22:53:44 ET
Summary
- DoorDash stock price has increased by 16% since announcing its third-quarter earnings and has gone up by 44% since April.
- The Company's financial review shows decelerated revenue growth but improved profitability, with a record-low net loss and margin.
- Near-term risks include potential stock price decline and lack of catalysts for growth, but long-term upside potential remains.
- DASH boasts the highest gross margin and levered free cash flow margin compared to similar marketplace model companies like Uber and Amazon.
- The success of Meituan, a Chinese peer, demonstrates the potential profitability of food delivery businesses and the possibility of expansion into other sectors.
Earnings Report and Stock Performance
DoorDash (DASH) released its third-quarter earnings report on November 1. Since DoorDash announced its third-quarter earnings, its stock price has increased by 16% since then. Additionally, DoorDash's stock price has gone up by 44% since we first started covering the company in April.
Investment Thesis
There is a risk that DoorDash's stock valuation multiple could reprice lower in the near term as the company's growth rate has slowed in recent quarters. Management's Q4 guidance indicates slowing growth will continue. In addition, we don't see much potential for near-term catalysts to boost the stock higher.
However, from a long-term perspective, we still see attractive upside potential compared to retail and on-demand peers like Uber (UBER), CVS (CVS), and Amazon (AMZN). DoorDash has competitive advantages, including a large delivery fleet and leadership in high-frequency purchase categories. This gives it the potential to further grab market share.
After weighing the near-term risks and long-term reward potential, we remain inclined to maintain our rating. We view any near-term pullbacks due to slowing growth as potential buying opportunities. However, investors may want to rebalance holdings to account for the risks highlighted.
Financial review
Despite DoorDash reporting decelerated revenue growth of 27% in the third quarter, which is the lowest revenue growth rate over the past few quarters, the company was able to lower its GAAP net loss to $75 million, which is a record-low net loss for DoorDash. The net loss margin was -0.4% which is also a record low. The market appears to be focusing more on DoorDash's profitability rather than its revenue growth, even though the 27% revenue growth rate still outperforms the overall industry.
Growth Comparison
Compared to other companies with a similar marketplace model that focus on consumer convenience like Uber and Amazon, DoorDash has the highest gross margin and levered free cash flow margin. In the third quarter, DoorDash's revenue growth rate was 27%, which was only slightly slower than its Chinese counterpart Meituan, which had 33% revenue growth. Even though DoorDash's revenue growth decelerated in Q3, its gross margin and free cash flow margin are superior to peers like Uber and Amazon which operate under a similar convenience-focused marketplace model. DoorDash's 24% Q3 revenue growth is not far behind Meituan's 33% growth in the same period.
Operational Insights
In the third quarter, DoorDash's management disclosed more details about the company's operations. We believe these operating metrics provide useful insights for investors.
The chart below shows DoorDash's monthly (January) marketplace Gross Order Value ("GOV") by cohort. We have a couple of observations:
- The 2020 cohort is unique because COVID-19 had an impact on its gross order value (GOV). The other cohorts performed similarly.
- The 2021 and 2022 cohorts had lower GOV than pre-pandemic levels, indicating purchasing patterns were negatively affected by inflation.
- Pre-pandemic cohorts (2017-2019) had growing ticket sizes that stayed relatively high.
To address weaknesses amid inflation, the company expanded into non-meal delivery and improved product experience. This explains why the 2023 cohort has outperformed pre-pandemic levels so far.
Investor concerns
Many investors have questioned the future prospects for DoorDash because they are concerned about the addressable market size for DoorDash's business. These investors are worried that DoorDash's total addressable market may be limited, which could restrict the company's future growth potential.
Meituan Case Study
Let's first examine Meituan, a peer in China. In 2013, DoorDash was established in California, three years later than Meituan. With a $88 billion market capitalization, Meituan is twice as big as DoorDash.
Meituan began as a food delivery service and later branched out into grocery delivery and hospitality. Being the leader in food delivery, it had two benefits: a large delivery fleet and a customer base with high-frequency purchases. As a result, it was able to penetrate the hotel booking industry and challenge industry leaders from China, like Ctrip (TRIP) in the hotel booking sector and Alibaba in the e-commerce sector.
Meituan is currently losing money on its newer grocery delivery business as it is still in the early phase and using promotional strategies to compete with other Chinese e-commerce platforms. However, excluding these new initiative businesses like grocery, Meituan has been able to maintain a 16% operating profit margin.
In addition, Meituan currently has 677 million transacting users. This represents around 48% penetration of China's population of 1.4 billion people.
By capitalizing on its leadership position in food delivery, Meituan was able to grow its transacting user base to 677 million and become ingrained as a daily use app for mainstream consumers in China.
Meituan's case demonstrates that a food delivery business has the potential to be highly profitable. It also shows how a company can leverage competitive advantages built-in food delivery to successfully expand into other business categories.
Marketplace Model Potential
Second, the convenience consumer market is massive in the U.S., as evidenced by two giants - Amazon (market cap of $1.4 trillion) and CVS ($87 billion). This presents a huge upside for DoorDash as it expands into non-meal delivery.
Compared to CVS and Amazon, DoorDash has a much higher profitability level and growth rate. This demonstrates that DoorDash has more budget flexibility for marketing to compete with peers and is grabbing shares.
DoorDash has almost three times the gross margin of CVS because of different business models. DoorDash utilizes a marketplace model - it serves merchants without carrying inventory. CVS uses a traditional retail model where it purchases and holds inventory. Hence, DoorDash has lower variable costs and higher scalability.
Additionally, in Meituan's case, the company has 3 income streams from its food delivery business: delivery fees, commissions, and online marketing services. Though Meituan operates food delivery at a loss, it achieved a 16% operating margin overall(excluding grocery delivery) through higher margin commission and marketing revenues.
DoorDash management mentioned they are building and scaling a marketing services offering. This can be a new growth driver going forward, and we are interested to see more detailed revenue breakdowns in the future. The growth of marketing services could be a potential catalyst.
After all, we believe the marketplace model will overtake the traditional retail model due to higher profitability. For example, Amazon is gradually expanding its marketplace model as well.
Compared to Amazon, DoorDash has the advantage of a larger delivery fleet. Hence, DoorDash has a delivery cost advantage in last-mile delivery.
DoorDash's fleet exceeds 2 million, dwarfing Amazon's 275k drivers. Due to its extensive fleet network, DoorDash has an edge in terms of delivery costs.
In addition, DoorDash's margins demonstrate this advantage over retailers like CVS. Therefore, we remain confident that DoorDash will continue taking market share from CVS and Amazon in the short to medium term as it leverages its asset-light marketplace model. The expansion into marketing services also provides a promising new revenue stream as evidenced by Meituan's experience.
Downside Risk
DoorDash has seen decelerating revenue growth over the past few quarters. There is a risk that valuation multiples could shrink if the market views DoorDash's growth as plateauing.
The company guided to further slowing growth in Q4, projecting gross order value (GOV) to increase 19% and maintaining a flat EBITDA to GOV margin of 2.1%. DoorDash partially attributed the slowdown to New York's ruling on minimum wage for its delivery drivers (dashers).
And from the financial impact perspective itself, any impact from the New York City ruling in Q4, we've included that in our EBITDA guidance that we've given.
DoorDash currently trades at a historical low of 4.1x price-to-sales as growth has decelerated. If growth slows further into 2024, the stock could reprice below 4x. For example, if the market applied a 3x P/S multiple due to slowing growth, it would represent a 27% or greater downside for the stock.
Valuation upside
However, there is also long-term valuation upside potential. Our initial price target was based on DoorDash's long-term potential compared to Uber. We believe DoorDash has a similarly sized addressable market, so its long-term potential market cap should match Uber's current $106 billion valuation.
Compared to retail peers like CVS (market cap $87 billion) and Amazon ($1.48 trillion), DoorDash still has room to grow. In the long run, its total addressable market should allow DoorDash to reach a market cap at least on par with CVS, if not greater.
Conclusion
The stock has risen 47% over the past year. We see a risk of near-term valuation multiple compression, given slowing growth recently. However, DoorDash still outperforms peers and has growth drivers like advertising and non-meal delivery that could reaccelerate growth in 2024. So we view the short-term risks as somewhat acceptable.
Longer term, DoorDash will continue dominating food delivery in the US and can leverage its delivery fleet scale to expand into other categories and revenue streams under a marketplace platform.
We believe DoorDash's valuation remains inexpensive compared to retail peers like CVS and on-demand platforms like Uber. There is a substantial long-term upside based on the large addressable market.
While there are near-term risks from slowing growth, the long-term upside potential remains very significant given DoorDash's competitive advantages and multiple paths to expand its marketplace. On a risk-reward basis, we maintain our Strong Buy rating considering the still cheap long-term valuation. Slowing growth is a concern to monitor, but not enough to outweigh the sizable long-term opportunities.
For further details see:
A Roadmap For DoorDash In Times Of Slower Growth