2023-12-07 00:24:55 ET
Summary
- DoorDash holds a dominant 65% market share as the #1 online food order aggregator in the U.S.
- The company's impressive growth is driven by its popularity and easy-to-use interface, with analysts expecting 30% growth in the next few years.
- DoorDash has the potential for significant growth through merchant diversification and expansion into delivering other goods and services.
- Risk to Reward has been phased out, but long term, I believe DoorDash is here to stay.
Investment Thesis
DoorDash ( DASH ) has been in my doghouse since its IPO. My initial dislike stemmed purely from personal preference; I simply didn't see the appeal of the product or business model. If I wanted to avoid cooking, I preferred getting takeout. The additional expense of delivery fees and a tip didn't justify the convenience for me.
Despite my lack of personal use, I find the stock to be quite exciting.
DoorDash holds the dominant #1 position (sign-in required) as an online food order aggregator in the U.S., boasting a massive 65% market share . This dwarfs competitors like Uber ( UBER ) at 24% and Grubhub at 9%.
DoorDash boasts impressive numbers, with over 450,000 merchants using its service, 20 million customers ordering food, and 1 million dashers delivering it. Sales continue to surge, with analysts anticipating 30% growth this year and 17% growth next year.
The company's high growth is attributed to being in the right industry at the right time. Analysts estimate the value of the on-demand goods and services delivery market to reach a staggering $1 trillion by 2025!
DoorDash's growing popularity and user base continue to impress. In September, management announced a double-digit year-over-year increase in monthly active users (MAUs). This increase strengthens their position to attract high-margin advertising from partners and merchants. Consequently, analysts expect NON-GAAP EPS to grow nearly twice the rate of sales over the next three years.
Another area I see significant growth potential for DoorDash is merchant diversification. Beyond delivering food and groceries, they have the opportunity to expand into delivering tools, clothing, prescriptions, essential needs, and much more.
Management is already moving in this direction, as evidenced by their recent partnership with Best Buy ( BBY ) to become the first to offer electronics delivery. This partnership marks the beginning of a broader expansion strategy for DoorDash.
While the stock has soared 99% year-to-date (YTD), leading to some insider selling, its current market capitalization of $38 billion pales in comparison to Uber's $120 billion, despite Uber's 135% YTD gain.
With steady industry growth projected, I believe DoorDash is well-positioned to capitalize on both revenue and profitability going forward. While the risk-reward ratio is less favorable than previously, it still offers a potential 10% upside from my base case price target for the next twelve months.
Typically, I prefer a 3x risk-reward opportunity to consider a "buy" rating. After this year's strong run and remaining risks, DASH currently presents a less appealing 1.5x risk-reward ratio. Therefore, I rate the stock a "hold." However, any signs of weakness and a subsequent pullback would prompt me to recommend a "buy" rating.
To be frank, people have been asking me about my current stock preferences. Following November's market rally, I'm hesitant to buy much of the market... nothing feels cheap. However, DASH has sparked my interest and earned a spot in my bullpen!
Fundamentals
The financials are becoming increasingly impressive! Free cash flow ((FCF)) now sits above $1 billion on the balance sheet, translating to a nearly 3% FCF yield for a company still in its early growth stages. This is particularly remarkable considering the company's strong financial position, with minimal debt of just $493 million compared to its robust cash and cash equivalents of $3.8 billion . This negative net debt position indicates financial stability, greater flexibility for future investments, and potentially lower risk.
It's important to note that DoorDash has a beta of 1.72x, meaning it is almost twice as volatile as the S&P 500. Due to its volatility, DoorDash isn't suitable for risk-averse investors. Instead, it appeals to those seeking growth and outperformance in a rapidly expanding industry.
Both sales and earnings are expected to grow in the mid-20s and low-30s for the next few years. This anticipated growth has led to an expanded multiple and high volatility in the stock price as investors attempt to price in the potential of DoorDash and the industry.
Two key indicators to watch for DoorDash going forward are margin improvement and GAAP/Non-GAAP profitability. Additionally, it's crucial to monitor the growth of the take rate as a percentage of Gross Order Value (GOV).
GOV represents the total amount spent on orders placed through DoorDash, while the take rate is the percentage of GOV that DoorDash retains as revenue. It essentially measures the platform's profitability per order.
Maintaining and increasing the take rate will be crucial for DoorDash's continued profitability. While attracting new users and establishing platform usage is the current priority, optimizing the take rate will become a key performance indicator (KPI) in the next 2-3 years to drive cash flow and earnings growth.
With GOV and sales expanding at a rapid rate and DoorDash increasing its operational efficiency, I expect non-GAAP operating margins to climb from the current 14% to the low 20s. Additionally, I anticipate the company reaching GAAP profitability by 2025.
If management announces achieving GAAP profitability by 2024 and the growth outlook remains optimistic, I believe the stock has the potential to nearly double over the next 5 years. DoorDash is poised to become a $60 billion+ business in the next few years.
Price Target & Valuations
DoorDash currently trades at a 2024 non-GAAP price-to-earnings (P/E) of 37x. For a company that's arguably a tech company (logistics platform) with expected growth and margin expansion, forward earnings multiple of 37x is not excessive, especially considering it falls to 27x for 2025 earnings with analysts still expecting near 30% EPS growth.
Utilizing the analyst estimates mentioned earlier, along with DoorDash's historical valuations from its short time on the market and competitor data, we can create a next-twelve-month (NTM) price target scenario table with bull, base, and bear cases.
As you can see, the stock trades in a wide range due to its 1.72x beta , as demonstrated by the numbers. I use a price-to-earnings (P/E) range of 30x to 60x to indicate a bear and bull scenario, respectively. I utilize 2024 estimates to reflect the market's current valuation calculations.
The volatility is evident in the percent return column on the right. While there is significant upside potential, there is also respectable downside risk. I believe that long-term investors would be comfortable buying and holding at the current price. However, I would prefer a lower entry point before acquiring a full position in DoorDash.
Analyzing DoorDash's current chart, if it holds below $100, a key psychological resistance level, I expect a retracement to test support at $92.50. A break either way, above $100 or below $92.50, will indicate whether the bulls or bears are in control.
If the stock breaks lower, I would start establishing a full or larger-sized position in the mid-$80s. This is because this price point aligns with our desired 3x risk-to-reward ratio.
A break above $100 this week would prompt me to hold my existing position if I already own it. Otherwise, I would remain on the sidelines and wait for the next opportunity.
Risk
The biggest risk surrounding DoorDash is the looming court ruling regarding whether the company and its competitors are obligated to pay their workers/drivers minimum wage. If the ruling compels DoorDash to pay minimum wage, it could significantly impact their earnings, profitability, and future cash flows.
Currently, the case is focused on New York, where Dashers could be entitled to nearly $18 per hour. If the state prevails, the ruling could be replicated in other states, resulting in nationwide minimum wage payments for Dashers, which would represent a substantial expense and tax on potential earnings.
Another major risk for DoorDash is its dependence on Dashers. What happens if they don't have enough drivers to meet demand? Or if Dashers go on strike? Additionally, concerns exist regarding the quality of individual Dashers – their timeliness, courtesy, and care for customers' food and property. All of these factors raise questions about how DoorDash manages its relationships with Dashers and the ongoing dynamic between all parties involved.
DoorDash must effectively manage the relationships between merchants, Dashers, and end customers, which is a significant responsibility. Keeping everyone satisfied, including shareholders, can be a demanding task at times.
Execution and adaptation will be crucial for DoorDash's future and growth. Providing excellent service, communication, and speed will keep operations running smoothly and cash flow thriving, which will ultimately keep shareholders happy.
Conclusion
DoorDash has made itself an indispensable part of millions of people's weekly routines. The convenience of ordering food from virtually any restaurant in their vicinity is an invaluable utility for many.
DoorDash has carved out nearly two-thirds of the food delivery market, and the industry is expected to continue its rapid growth over the next five years and beyond.
Management is deeply committed to expanding delivery options and increasing customer reach and usage. Given the surprising stickiness of its product and its focus on high-quality food and service delivery, I have high hopes for DoorDash's future.
While I wouldn't hesitate to hold my existing stock, I would recommend gradually adding to a new position through piece-by-piece purchases on dips. The risk-to-reward ratio is not as favorable as it was at the beginning of the year, but I believe there is still ample opportunity and reason to hold DoorDash.
For further details see:
DoorDash: Pounce On The Stock If There Is Weakness