2023-12-21 18:50:31 ET
Summary
- DoorDash's recent "2023 Trend Report" highlights the company's strong connection with contemporary consumer trends, emphasizing convenience and impulse buying, which challenges the bearish perspective on the stock.
- The report reveals significant data and narratives that suggest a growing market for DoorDash's services.
- I maintain a sell rating due to valuation, but I fully recognize the technical and business case for higher prices to come.
DoorDash ( DASH ) is up 30% since I rated shares a sell in late September . A little over a month later, the company’s Q3 earnings report was well received and launched the stock on its current upward trajectory. While the stock is down since its addition to the NASDAQ 100 , that milestone solidifies the company’s overall stature.
For example, DoorDash is an expert operator and delivered the goods in Q3 in the form of operational efficiencies and guidance above expectations . Yet, I am not swayed by these results. I am clinging to my base claim that DoorDash’s delivery service, and thus its stock, is not worth the premium.
Now enter a fresh knock on my bear case: DoorDash’s “ Decade Delivered: DoorDash’s Dash From the Past 2023 Trend Report and a Look Back at Ten Years of Deliveries ” report. In this report, DoorDash makes a case for serving a culture of impulse and convenience. The company reviews order trends over the past year and celebrates the past 10 years of DoorDash’s history. Much of the report reads like a marketing campaign for DoorDash’s services by providing a panoramic view of the key patterns and behaviors of DoorDash customers. These are definitely people who value convenience over cost; “dash” must be a verb meaning to conjure up even the smallest everyday items and impulses with a simple tap of the app. DoorDash even serves the planners in the company’s top cities for scheduled deliveries: Chicago, Los Angeles, San Francisco, Houston, Atlanta, Dallas, Denver, and Philadelphia (in descending rank).
Unfortunately, hard numbers are few in the report. Still, the two hard data points are eye-catching:
- After holidays, orders for the painkiller ibuprofen jump: for example, “upwards of 400% the day after Halloween for certain types of ibuprofen.”
- Orders between midnight and 5am increased 36% year-over-year. As a result, DoorDash expects 2024 to be the year of “late night snacking.” Over the years, late night eating has been heavily promoted by companies like Taco Bell ( YUM ) and its “fourth meal” and Jack in the Box ( JACK ) with its Munchie Meal . Right before the pandemic started, the Hartman Group released a study on fourth meal eating called “ The Fourth Meal: Late-night Eating and Snacking Is Back on the Radar .” On a related noted, DoorDash reported a jump in orders for comfort foods during the 2016 and 2020 Presidential elections. Imagine the comfort food bonanza coming in 2024…
I prefer substantially more quantification of the trends (especially to identify the countertrends or patterns in decline), but I will interpret these numbers as setting a baseline understanding of the cultural and behavioral backdrop that supports DoorDash’s business. DoorDash qualitatively summarizes the trends of 2023 with this nifty and telling narrative:
“Today, you can order everything from dinner to groceries, to your favorite team’s jersey, to that new lip gloss you saw on TikTok, and so much more. Let’s say you’re getting ready for a night out and realize you desperately need some emergency eyelash glue (seriously, it’s the most ordered beauty product this year). Done. And when you get to the party, you can replenish your friend’s cinnamon whiskey with a quick order from the corner store (so nice of you!). Tomorrow morning, you can recover with an egg sandwich and ibuprofen dashed to your door before you’ve even gotten out of bed. All the essentials, covered.”
DoorDash’s most popular food items are comfort and finger foods. The report does not specify how often these items are ordered individually. However, the focus on fries as the leading choice suggests that many users turn to the app specifically to fulfill the urge for consuming fries. As highlighted in the report, “since 2013, over 600 million orders of fries have been delivered by Dashers, meeting our cravings when they hit hardest.” Interestingly, DoorDash implies a preference among people for ordering fries rather than making them at home, despite fries being an easy-to-prepare comfort food. The company describes fries as “a perfect food that (almost) no one’s making at home.” This tendency implies that DoorDash’s customers highly value immediate convenience and/or have a strong preference for fries from certain restaurants!
Here is DoorDash’s top 10 foods of the year:
- Fries
- Chicken Quesadilla
- Mozzarella Sticks
- Garlic Naan
- Spicy Chicken Sandwich
- Pepperoni Pizza
- Chips & Queso
- Traditional Wings
- Cobb Salad
- Fried Rice
Undermining the Bear Case
So if the (American) culture is slipping further in the direction of convenience and gratification over cost, then my bear case has wobbly legs. Again, my core premise and claim is that the cost for this convenience is not worth the current and rising premiums. If consumers are transitioning budget away from other things to accommodate convenience buys, then the DASH narrative can continue apace for quite some time. The company’s commentary from the earnings conference call suggests that DoorDash is succeeding in servicing the culture of convenience (emphasis mine):
“…the behavior that we’ve seen from user base is, the number of users that use both restaurants as well as new verticals, that number continues to increase every single quarter. The impact that’s having on the business is that’s lifting overall engagement of the cohorts up. We are starting to see that in the order frequency for the entire cohort.
Again, to be very clear, we are not trying to drive the order frequency of just restaurants or new verticals, the way we think about it is how do we bring more users back, which is helping us drive overall users at a double-digit rate. How do we get them to use the product more, which is what’s being reflected in the overall order frequency going up . In fact, I mean, we are very pleased with the progress, and this is contributing to the strong growth that you’ve seen over the last couple of years.”
In other words, the burden of proof is on the bearish case. The headwinds I claim make DASH a poor buy are located somewhere over the horizon sitting at an unknown distance.
Short Term, Intermediate Term
So what do these claims and counter claims mean for the trading or investing case for DASH?
I can understand and even agree with the short-term case where DASH is a trend-following trade or investment. The 20 and 50-day moving averages (DMAs) point toward higher prices. November earnings created a major breakout above the previous 2023 high. Moreover, animal spirits are strong in the current stock market.
An intermediate view of DASH reveals even more clearly a favorable uptrend for DASH since the early days of the recovery from the 2022 crash. The August earnings that encouraged me to issue a sell rating seemed to break that recovery, but the November earnings revived the recovery. From a technical perspective, I can see DASH gliding its way back to its April, 2022 high before running out of steam.
And Yet the Bear Lives
Having said all that, I almost talked myself into standing down from the sell rating. However, I look at the negative earnings and management’s focus on growth over profitability, and I cannot shake my bias for preferring a discount for such a business…especially when I am not bought into the culture of convenience.
DASH certainly trades at a tremendous discount from the hyperventilating chase for growth companies in the wake of the pandemic. At a price/sales ratio of 5, DASH compares favorably to itself even though the ratio remains higher than Uber which has ambitions overlapping with DASH.
Five times sales is about the absolute maximum I want to pay for an unprofitable business with extremely high stock-based compensation. As of the last 8K filing , DASH expects stock-based compensation to grow from $888M in 2022 to $1.1B in 2023, around half the revenue DASH earned in Q3 alone.
Thus, all things considered, I still rate DASH as a sell even though I can sympathize with trend-followers who will ride the train as far as it can take them from here.
Be careful out there!
For further details see:
How DoorDash's Trends Report Undermines The Bear Case For The Stock