2023-08-07 08:51:53 ET
Summary
- We’re downgrading DoorDash to a hold post-Q2'23; the stock is up roughly 52% since our buy rating in December, outperforming the S&P 500 by around 11%.
- We now believe the recovery has been priced into the stock and see outperformance moderating in 2H23 as we expect total order Y/Y and QoQ growth to slow.
- We’re constructive on DoorDash’s dominant position in the U.S. consumers’ meal delivery sales; however, we expect the stock to feel a negative impact from macro weakness in 2H23.
- The stock is trading at 3.0x EV/C2024 Sales versus the peer group average of 2.6x. We think the higher multiple isn’t justified at current levels.
- We recommend investors stay on the sidelines in the near term as we see growth moderating in 2H23.
We're downgrading DoorDash ( DASH ) from a buy to a hold as we now believe the stock has priced in the expectation of recovery and see near-term headwinds from the macro backdrop pressuring consumer spending.
The stock is up 52% since our buy-rating in early December, outperforming the S&P 500 by around 41%. YTD, DoorDash has also rallied 73% compared to the S&P 500, up 17% during the same period. DoorDash has rebounded nicely from post-pandemic lows; in 2022, the stock declined roughly 67%, underperforming the S&P 500 by a whopping 48% due to the company losing its pandemic catalyst. Consistent with our expectations in December, the stock has recovered from post-pandemic weakness. Now, our downgrade is based on our belief that the expectation of recovery has been factored into the stock, and we expect order growth to normalize and recommend investors count their profits at current levels and wait on the sidelines for near-term weakness to play out.
The following graph outlines our rating history on DoorDash.
Q2'23 and What's Next?
DoorDash reported revenue up 33% Y/Y to $2.1B and up 2.8% sequentially from $2.04B last quarter ; GAAP EPS came in at -$0.44, missing estimates slightly; the stock jumped post-earnings announcement of DoorDash's "best quarter ever for revenue, total orders, and Marketplace GOV." We now think our investment thesis of post-pandemic recovery has been priced into the stock, and we're downgrading to hold as we see near-term challenges limiting the company's outperformance in 2H23. The following chart outlines DoorDash's financial metrics for Q2'23.
Total orders were up 25% Y/Y and 3.7% sequentially to 532M. We're seeing order growth as a percentage moderate this quarter; in 1Q23, the company reported total orders up 27% Y/Y and 8.7% sequentially. The same slower percentage growth stretches into Marketplace GOV Y/Y growth; this quarter Marketplace GOV grew 26% Y/Y and 3.3% sequentially versus last quarter at $15,913, up 29% Y/Y and 9.2% sequentially. We think it'll be more difficult for DoorDash to now maintain high double-digit growth during the macro backdrop of the back end of the year. While DoorDash remains the dominant player in the U.S. meal delivery market , with roughly 65% of monthly sales in June, we still don't think it's immune to pullbacks in consumer spending. DoorDash rival Uber ( UBER ) is still recovering its delivery segment from post-pandemic lows; in Q2'23, Uber reported delivery gross bookings up 12% Y/Y to $15,595M and maintained a sequential upward trend and a higher percentage growth QoQ from $15,026M in 1Q23, up 8% Y/Y and $14,315M, up 6% Y/Y in 4Q22. We continue to expect the delivery market to recover into 2024 but see recovery slowing in the back end of the year, and hence, we are downgrading the stock to a hold.
Additionally, we expect DoorDash's non-restaurant deliveries and expansion into the grocery space to further boost its market share and customer retention. Still, we think this will be more of a longer-term growth catalyst for the stock, and we see some intensifying competition with Amazon ( AMZN ) on this front.
The following chart outlines June 2023 meal delivery market shares.
Valuation
The stock is trading well above the peer group; we don't think the high valuation is justified considering the company's vulnerability to consumer spending cuts. The stock is trading at 3.0x EV/C2024 Sales versus the peer group average of 2.6x.
The following chart outlines DoorDash's valuation against the peer group.
TSP
Word on Wall Street
Wall Street is bearish on the stock leaning toward a hold. Of the 35 analysts covering the stock, 13 are buy-rated, 20 are hold-rated, and the remaining are sell-rated. The stock is currently priced at $86 per share. The median price-target is $93, and the mean is $91, with a potential 6-9% upside. While we're constructive on DoorDash showing signs of stable U.S. restaurant marketplace growth and acceleration in U.S. non-restaurant categories, especially grocery, we don't see the stock meaningfully outperformance in 2H23.
The following charts outline DoorDash's sell-side ratings and price-targets.
TSP
What to do with the stock
We're downgrading DoorDash to a hold from a buy; the reason we're not downgrading to a sell is that we think investor confidence in DoorDash's raised annual core profit forecast for the second time will carry the stock higher. The company now expects adjusted EBITDA to be between $750M to $1.05B versus the prior outlook of $600M to $900M. We remain constructive on the stock in the mid-to-long run but see near-term headwinds pressuring consumer spending and believe the recovery has been priced in at current levels. We recommend investors stay on the sidelines to see how investor confidence will play on the stock.
For further details see:
DoorDash: Downgrading To Hold, Recovery Priced In