Please ensure Javascript is enabled for purposes of website accessibility

Can DoorDash Make a Quick Turnaround in 2021?

By Rhian Hunt - Jan 28, 2021 at 7:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The food delivery company draws a lot of bearish predictions, but are the doomsayers ignoring something?

While it might seem counterintuitive to ponder if food delivery service DoorDash Inc. (DASH -8.33%) can make a turnaround just slightly more than a month after its Dec. 9, 2020, IPO, the company's extremely high stock valuation when it went public raises the question of whether it will rise or sink from here.

On the surface, a nearly $200 share price looks overvalued, since the company operates in the crowded, unprofitable food delivery sector. But those interested in consumer discretionary stocks might want to consider other factors that suggest DoorDash could see strong 2021 gains if it plays its cards right.

"The most ridiculous IPO of 2020"

DoorDash threw down the gauntlet to the market boldly when it made its IPO at $102 a share on Dec. 9 rather than the lower prices which were initially proposed. The stock's value almost immediately witnessed runaway growth, opening at $182 and rising to more than $189 per share before slumping over the course of December. The price dropped to a low of approximately $140 in early January before starting another volatile rise to roughly the $190 level.

Herds of bulls and bears clashing

Image source: Getty Images.

Several major Wall Street analysts weighed in on the bear side, with one of them, Citron Research, setting a $40 price target for DoorDash and thereby predicting a 74% crash in its value. At the time, Citron analysts called the company "the most ridiculous IPO of 2020." DoorDash's initial $182 IPO price set its valuation at roughly 30x sales.

While the company's fiscal 2020 revenue jumped 150% year over year to $2.2 billion, the temporary boost of restaurant dine-in shutdown and food delivery during COVID-19 figures into that result. Additionally, the company continues to post net losses despite the revenue jump.

DoorDash currently controls about 50% of the food delivery market in the U.S. However, it is the largest player in a notoriously unprofitable industry. Even as the pandemic drove record levels of at-home deliveries from restaurants, companies like Grubhub (GRUB) continued posting net losses even as their gross revenue soared, calling the viability of the entire business model into question. Business Insider reports that Deliveroo, whose IPO has not yet occurred but is expected soon, said it was near "collapse" from its losses during the delivery boom of early 2020, though it ended the year describing itself as "operationally profitable."

Superficially, at least, the "bears" offer a somewhat persuasive case given DoorDash's past history and the ongoing lack of significant profits in the food delivery sector in general. But there are other matters in play that those investigating the company should consider.

DoorDash's universal delivery strategy

If food delivery was the sum total of DoorDash's future potential, the stock very likely wouldn't do anything exciting in 2021 or 2022, and its price might fall well below its IPO level. This would be especially true if dine-in options continue to reopen in the markets it serves. However, the delivery company appears poised to use its network and the funds secured through its IPO to attempt a big expansion into fresh delivery territories.

DoorDash's latest promotional campaign will provide clues about the company's coming strategic focus. Its first-ever Super Bowl television ad is 60 seconds long and will cost more than $11 million, according to sources. DoorDash is willing to spend heavily to get this new message across to a maximum number of potential customers.

According to DoorDash management, the message (provided in a commercial showcasing a parade of Muppets and rappers) involves "deliveries of neighborhood favorites beyond food, highlighting the breadth of DoorDash use cases and platform categories like restaurants and convenience." The company's Chief Operations Officer Christopher Payne says the company's goal is to "empower any business on Main Street to thrive online" and that it is changing its "brand image from a food delivery logistics company to a multi-category marketplace."

A man in mask and latex gloves taking delivery boxes out of a van.

Image source: Getty Images.

Cutting through the buzzwords, DoorDash is in the process of taking its far-flung local delivery platform and network and switching over to extremely fast local delivery of a huge range of goods, and not just food. Local businesses, including single-location, family-owned stores with internet access, will be able to sell their items online and have them delivered to the homes of local shoppers by DoorDash the same day, likely within an hour or two in many cases.

If this initiative proves successful, it could potentially put DoorDash at the spearhead of a groundbreaking new business model. The simplicity and directness of ordering through DoorDash's app could make it an extremely attractive process for both customers and sellers. The model could potentially be more streamlined, and offer faster delivery than even Amazon's (AMZN -5.93%) seller services, tapping into local businesses on Shopify or similar platforms to offer effectively immediate courier delivery rather than a several-day delay caused by shipment from a warehouse.

Small businesses could also benefit, taking sold items off the shelf or out of the stockroom rather than needing to commit to shipping stock to an Amazon warehouse, where it then needs to be separately tracked, increasing paperwork, hassle, and complexity, and is also unavailable for local sale.

DoorDash has already partnered with large supermarket chain owner Albertsons Companies (ACI -6.57%)  to deliver groceries to customers at home, showing the initiative is already underway. During the summer, it started deliveries from other grocery and pharmacy chains. At that time, the company stressed speed in a blog post, remarking that its "on-demand grocery service is a nice addition to our online shopping options and with delivery in under an hour."

Is DoorDash lined up for a sprint?

If DoorDash remained a restaurant delivery company only, it would very likely continue to suffer from the same structural profitability problems as rivals like Grubhub, and significant further growth would be difficult. However, the company seems strongly focused on vastly broadening the product categories it delivers to pretty much everything under the sun. Its platform and network of independent couriers or "dashers" represents low-overhead, same-day (often same-hour) delivery infrastructure already in place across most of the U.S. and Canada, which is cost-effective for even one-location "mom and pop stores" to use.

Assuming DoorDash can successfully create widespread awareness of its immensely widened delivery service -- its Super Bowl ad takes a big step toward "getting the word out" -- it appears strongly positioned to build its new on-demand delivery model into an extremely lucrative business. Its strategy has the potential to enable it to thrive in parallel with Amazon, and perhaps even directly challenge the online retail giant for market share.

The weakness of the analysts' bear cases is that they assess the company as a restaurant delivery service only, overlooking the major strategic shift even now in the process of being executed. It does indeed appear DoorDash may be able to make a quick turnaround during 2021, and might even be winding up for a bull run, potentially making it just as successful, profitable, and highly valued as several of today's leading retail giants.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

DoorDash, Inc. Stock Quote
DoorDash, Inc.
$63.60 (-8.33%) $-5.78, Inc. Stock Quote, Inc.
$2,170.48 (-5.93%) $-136.89
GrubHub Inc. Stock Quote
GrubHub Inc.
Albertsons Companies, Inc. Stock Quote
Albertsons Companies, Inc.
$27.32 (-6.57%) $-1.92

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.