2023-05-05 21:40:46 ET
Summary
- DoorDash grew at a double-digit rate and raised its guidance, demonstrating its ability to execute its strategies and invest in growth areas.
- DoorDash has a strong growth prospect in the under-penetrated food delivery market, as evidenced by its market share gains over Uber and double-digit growth.
- The company has similar size to TAM as Uber but only trades at 1/3 of Uber's market cap, indicating strong upside potential for the stock.
Investment Thesis
We wrote an article about this company on April 17, " DoorDash ( DASH ) Stock: Potential Of On-Demand Platforms Beyond Inflation Worries" and we gave it a Strong Buy rating. DoorDash Inc. (NYSE: DASH ) reported earnings on May 4. The stock was up 8.3% (including 4.8% in the afterhours) after we published the article. This article is to review the company's Q1 earnings and evaluate our rating for the stock.
The company grew at a nice double-digit rate and raised guidance. There are a couple of growth drivers and margin expansion opportunities for the company. The company has a similar size to TAM as Uber and only trades at 1/3 of Uber's market cap. We believe the stock has strong upside potential. We maintained our rating as a Strong Buy.
Key Takeaways from Q1 2023 Earnings:
During Q1 2023, the company's outstanding execution and continued investment led to significant progress towards achieving key strategic and financial goals. The reported data showed a 27% year-over-year increase in total orders and a 29% year-over-year increase in Marketplace Gross Order Value (GOV).
In light of this performance, the company raised its guidance for the second quarter of 2023, with the expectation that GOV will increase by 23% and adjusted EBITDA will increase by 113%. For the full year of 2023, the company anticipates a 19% increase in GOV and a 107% increase in adjusted EBITDA.
These metrics demonstrate the company's ability to effectively execute its strategies and invest in growth areas, resulting in strong financial performance. The increased guidance for the second quarter and full year indicates the company's confidence in its continued ability to drive growth and value for shareholders.
Growth Drivers
Under-penetrated delivery market DoorDash appears to have a strong growth prospect in the food delivery category, given its recent performance and market position. Firstly, DoorDash has been winning market share over its biggest competitor, Uber, which suggests that it is still more popular than Uber among customers. In Q1 2023, DoorDash's Marketplace Gross Order Value (GOV) increased by 29% YoY to $15.9 billion, while Uber's Delivery Gross Bookings grew 12% YoY on a constant currency basis to $15.0 billion.
Moreover, both DoorDash and Uber have grown by double digits, which suggests that the food delivery market is still growing and under-penetrated for DoorDash. This can also be supported by the following: Uber and DoorDash are still investing in categories outside of restaurants.
We continued to make significant investments to improve the experience we offer in our non-restaurant categories and international markets in Q1 2023. Y/Y growth in Total Orders from our non-restaurant categories in Q1 2023 remained significantly higher than Y/Y growth in our U.S. restaurant category.
Grocery courier experience: Rolled out new features to improve the Shop and Pay experience for grocery couriers across the US, including suggested substitutions for out of stock items, digital payments, and enhanced upfront order clarity.
New Verticals merchant selection: Expanded our New Verticals selection around the world, as we launched PetSmart as a retail partner in the US; grocery delivery with Coles, Australia’s second-largest grocer; a convenience partnership with Mexican pharmacy Benavides; and alcohol delivery from all serviceable locations of the Liquor Control Board of Ontario (“LCBO”) in Canada.
At the same time, Amazon seemed to slow down. Both its online stores and physical stores slow down from double digit growth last year to single-digit growth this year.
Can Uber challenge DoorDash with Uber One?
During its Q1 earnings call, Uber's CEO Dara Khosrowshahi explained how Uber's platform power was contributing to improving category position in large markets and gaining market share in the delivery business. They had a structural advantage against their competitors, with a source of significantly low-cost traffic from their mobility business.
While Uber believes that it has a structural advantage over DoorDash due to its super app, we believe that this advantage is only limited to traffic acquisition costs.
In the delivery industry, where both Uber and DoorDash do not own inventory, consumers only care about price, making it a highly competitive market. Having a ridesharing customer base does not necessarily give Uber a significant edge over DoorDash, as supermarkets are mainly concerned with the number of orders and profits they receive. Whoever brings in more orders can negotiate a good take rate with retailers.
Moreover, both companies compete for advertising money. However, since they are marketplace platforms, not social platforms, there will be limited cross selling there. For example, a restaurant won't place ads on your ridesharing app since it has no utility.
SG&A leverage
When a company is in growth mode, its SG&A% can be volatile as it has to prioritize growth over saving. However, we continue to see DoorDash expand at a high double-digit rate and leverage SG&A expenses, meaning the company enjoyed a tailwind even in this challenging environment. DoorDash increased operating expenses by 31% YoY in Q1 2023 but decreased by 6% QoQ, and it aims to continue managing expenses while supporting business growth.
Increase the take rate to lift gross margin
As of Q1 2023, DoorDash's take rate was 12.8%, while Uber's was 20.6%. DoorDash should be able to increase its take rate to improve margins, given its size advantage. DoorDash has a larger market share in the US compared to Uber, with a staggering 65% share as of March 2023, while Uber has only 23%. This size advantage gives DoorDash more bargaining power against its merchants, allowing it to negotiate better deals and offer more competitive pricing to its customers.
Meal Delivery Market share (Bloomberg)
Valuation
Its stock traded at forward EV/Sales and EV/EBITDA of 2.62x and 30.4x, respectively, higher than Uber given its strong growth potential.
Valuation multiple (Seeking Alpha)
In our analysis, DoorDash Stock: Potential Of On-Demand Platforms Beyond Inflation Worries , we have a detailed discussion of the valuation of DoorDash and Uber based on their potential TAM. Our conclusion, as below, is that DoorDash had a similar TAM as Uber if we only consider their TAM as the market each has a leadership position in, which makes sense. However, DoorDash only has 1/3 of the market cap of Uber. Hence, we believe the stock has upside potential.
The total market value for food delivery in the United States and Europe was $231 billion and $113 billion. The total market value for ride-sharing in the United States and Europe was $71 billion and $69 billion, respectively.
Uber held a dominant position in the $253 billion combined ride-sharing and online food delivery markets in the United States and Europe. DoorDash only enjoyed a competitive advantage in the $231 billion US online food delivery market.
Share repurchase
As a growth company, DoorDash had minimum buybacks before 2021 but started with a $221 million buyback program that increased to $400 million in 2022. In Q1 2023, the company launched a new $750 million buyback program and completed a $500 million purchase. The size of the buyback is not meaningful for DoorDash. We consider this move more of a gesture to demonstrate its commitment to creating shareholder value.
Catalysts
Investors are unsure of DoorDash's profitability level because it keeps making investments in order to expand. Therefore, in our opinion, margin expansion is essential to realizing the potential of its stock value.
Summary
DoorDash continued to maintain its leadership position in the U.S. and grow at a high rate. DoorDash is able to manage costs to grow in this challenging environment. Its business model is responsive and adaptable. There are a couple of growth drivers that sustain its growth and provide margin expansion opportunities to increase earnings. We believe the ongoing margin expansion can be a catalyst for the stock to reprice. We maintained our Strong buy rating on this stock.
For further details see:
DoorDash Continued To Grab Uber's Dinner