2023-09-22 06:49:10 ET
Summary
- DoorDash's business model does not prioritize short-term profitability, focusing instead on long-term growth and investment initiatives.
- The company has made progress in improving unit economics and has significantly boosted its EBITDA guidance for the year.
- DASH's stock performance is closely tied to a consumer discretionary sector facing increasing headwinds, and recent technical breakdowns suggest potential downside risk.
Prologue
This past summer I let my DoorDash Pass subscription expire. I had the service for two years. I was lured in by a great introductory deal the first year, and I passively renewed the second year. Several factors contributed to my waning interest in DoorDash (and food delivery services in general). Most importantly, I noticed an increasing divergence in prices on DoorDash ( DASH ) versus the prices charged by restaurants and grocery stores. New fees and increasing fees became irritants. Combined, these price hikes made me more acutely aware of how the pandemic era "shelter in place", "stay at home" mentality had seduced me into overpaying for convenience. Moreover, I was tired of having to determine a tip before I experienced the service. So overall, the economics simply made little sense for me unless I took advantage of the occasional marketing deal.
My increasing awareness motivated me to choose investing in convenience over consuming convenience. For example, I think ahead to plan meals, and I make sure food is available for the occasions when I am pressed for time. Moreover, driving to my favorite restaurants is now an excuse to get out the house for a change of scenery and an opportunity to catch some more of my favorite podcasts. In other words, I renormalized my life away from DoorDash.
Revenue over Profits
My decision led me to wonder whether DoorDash had finally figured out how to make profits in the gig economy delivery business. The short answer is "no." However, much to my surprise, management makes it clear that even after 10 years of doing business, earning conventional profits is not in the game plan. From the recent shareholder letter released along with last month's Q2 earnings report (emphasis mine):
Most of our businesses operate across the digital and physical worlds, and many require entirely new processes, capabilities, and economies of scale that we have not yet developed. The only way we know of to scale these businesses is through consistent operational problem-solving over time…This process shows up directly on our income statement, rather than through the balance sheet and cash flow statement, which means our investment initiatives significantly reduce our short-term profitability …
...If we execute to the plans we have established, it may become difficult to offset improving profitability with new investments."
That last sentence is the most somber description of making money I have ever read from a publicly traded company! Still, management has an admirable, long-term approach to its business. This orientation makes DoorDash a strong competitor with an expanding portfolio of services pressuring incumbents whether digital or physical. The graph below summarizes the results: lots of revenue growth but declining income.
Strong revenue growth vs weakening net income. (SeekingAlpha)
The Reign of Unit Economics
Of course, growth-focused companies do not measure themselves by income. In DoorDash's case, "unit economics" is the key metric of progress. From the earnings conference call , where management jumps right into Q&A:
Our philosophy has always been, we goal our teams, we goal our lines of business on two metrics, which is demand in terms of volume growth as well as unit economics. As long as both of those are progressing in the right direction according to plan, we are happy to continue to invest because the most important thing in our business is scale"
To its credit, DoorDash is making progress on unit economics. A year-over-year "step change improvement" in unit economics supports guidance for Q4 growth in unit economics higher than Q3 growth. Net cash provided by operating activities grew 142% year-over-year to $1.01B in Q2 (presumably boosted by the acquisition of Wolt in June, 2022). Adjusted EBITDA hit an all-time high. Cash generation is strong enough to maintain $3.5B in cash, cash equivalents, and short-term marketable securities on the balance sheet.
An EBITDA Surge
The strong operating performance motivated DASH to significantly boost EBITDA guidance for the year from the numbers announced in Q1 earnings :
- Adjusted EBITDA: $750M to $1.05B from $600M to $900M
- Marketplace GOV (Gross Order Value): $64.2B to $65.2B from 63.0B to $64.5B
Interestingly, gross profit margins peaked in 2021 and 2022 and has slightly declined over the last year. I assume these dynamics come from DoorDash's constant experimentation and investment in new ideas and services. Meanwhile, total EBITDA margin has held relatively steady since peaking in December, 2021.
A peak in gross profit margin versus stabilizing EBITDA margin. (SeekingAlpha)
Unfavorable Comparison to Consumer Discretionary
So with price/sales at its lowest level since early 2021, DASH could be a stock where I ignore the lack of GAAP profits. In other words, growth looks reasonably priced at current levels.
Price/sales is at a 2+ year low. (SeekingAlpha)
However, upon closer examination, DASH looks like it is just a "leveraged" play on the consumer discretionary sector. The chart below compares the price return for DASH versus the Consumer Discretionary Select Sector SPDR Fund ( XLY ).
DASH and XLY are closely related with brief periods of accelerated divergence. (SeekingAlpha)
The overall correlation is readily apparent in the visualization with two notable divergences. During DASH's only period of sustained ascendance (see 2021), the stock rose faster than XLY. On the flip side, DASH sold off much more steeply than XLY in the plunge from the 2021 highs. This year, DASH is up 55% vs XLY's gain of 26%. DASH is down 69% from its all-time high while XLY is down 22% from its all-time high (and back in a bear market).
The latest technical breakdown in DASH suggests that the stock's long recovery this year may have finally exhausted itself with consumer discretionary looking increasingly tenuous with ominous macroeconomic headwinds piling up from high interest rates, student loan repayments, stubbornly high inflation (especially for shelter), and a likely peaking in GDP growth (per the Federal Reserve's Summary of Economic Projections ). These headwinds are blowing as competitors are gearing up to take on DASH's success. For example, Instacart's ( CART ) IPO raised $660M in fresh cash which will help the company compete better with DoorDash in grocery (more marketing, more promotions?). Grocery is an important growth area for DoorDash, a business grown into a multibillion business from "scratch" 2 1/2 years ago.
DASH looks like it topped out for the year ahead of Q2 earnings. (TradingView.com)
Neutralized Stock Repurchases
DASH's liquidity supported a $750M stock repurchase authorization in February. DoorDash spent all but $57M of that money on 11.2M shares (average purchase price of $61.88/share). The company did not commit to a fresh authorization. Normally, this commitment would motivate me to join the company in buying shares.
Unfortunately, DASH effectively neutralized the shareholder benefit of these repurchases with large quantities of stock-based compensation. In fact, over the past year the number of DASH shares increased to 389,563M from 356,630M. This 9.2% jump occurred as the company expects the value of stock-based compensation to surge from $889M in 2022 to an estimated $1,141M to $1,161M in 2023, an increase of 29.5% at the mid-range of expectations.
A Concentration of Consumers
I am also wary about the apparent lopsided buying profile of DASH's customers. In the conference call, management noted that "our top decile users are using our service, a very large number of double-digit times." DASH counts about 30M active users a month but there are "multiples" more users who only use DASH once in a year and then even higher numbers who open the app and order nothing. Of course, the company is focused on figuring out how to convert more of its customers into the double-digit stratosphere. The company wants to deliver at the "efficient frontier for each individual user, each individual occasion" which together gets order frequency higher. Overall order frequency is at an all-time high.
Conclusion: XLY Over DASH
Apparently, my story about DoorDash and DashPass is an outlier. The company reported that its MAUs (monthly active users) are retaining at "a higher rate." As customers order more, they upgrade to DashPass. I left DashPass just as the company enjoyed its best quarter ever for subscribers. It is very possible that the generation whose consumer habits are maturing into this new age of elevated convenience are increasingly seeing DoorDash, and services like it, as a necessary utility. Notably, management declared that the e-commerce imperative continues to grow robustly with increasing customer expectations pressuring businesses to consider services like DoorDash to help them:
…as e-commerce goes back into a bit of the steady state curve of adoption, I think there's a lot of problems there to solve, I think that there's the world only tends to want to go faster, customer expectations tend to only go in one direction, when it comes to something like delivery, whether that's with food or other types of items beyond food, that is only going to happen at a greater and greater rate, and if you're a physical retail, or you need to think about how you're going to participate in that.
…whether that's in logistics, whether that's in customer service, whether that's in, honestly, every part of what you do now needs to turn from physical to digital. That's what all businesses need to do. So there's a lot of work and the roadmap ahead is quite lengthy."
Thus, take my contrary attitude with a grain of salt. My willingness to pay for the convenience is, now by design, much lower than the apparent consensus. I also do not like the price of the stock at this valuation at this juncture in the economy. Profitless growth companies tend to underperform with higher rates (making DASH really stand out this year!), and the narrative of a quick pivot to Fed rate cuts is getting increasingly tenuous. Moreover, the DASH technicals and the risk/reward versus XLY are sufficient for me to issue a short-term sell on DASH. When the economy is turning the corner to faster growth, I can imagine DASH will come back as a turbocharged play on consumer spending.
For now, if I want to make an increasingly contrarian bet on the consumer in this current risky juncture, I would rather buy XLY as a way to reduce downside risk (note well that XLY is overweighted in Amazon.com ( AMZN ) and Tesla ( TSLA ) with about a 40% share of holdings ).
Be careful out there!
For further details see:
DoorDash: No Longer Willing To Pay The Price