DoorDash (DASH 7.15%), the top third-party food delivery platform in the U.S., attracted a stampede of bulls with its IPO last December. It initially priced its debut at $102 a share, but the stock closed at nearly $190 on its first day of trading.
The stock retreated to the $140s in January, but it's since rebounded to about $190 a share. But can DoorDash maintain that momentum and keep rising throughout 2021?
I believe four key factors will determine its fate.
1. The COVID-19 pandemic
DoorDash's revenue rose 204% to $885 million in 2019, then soared 226% year over year to $1.92 billion in the first nine months of 2020. It attributed that acceleration to the COVID-19 crisis, which forced many restaurants to close their dining rooms and rely on third-party delivery services.
DoorDash's net loss narrowed from $668 million to $207 million in 2019, then narrowed again year over year from $534 million to $149 million in the first nine months of 2020. The pandemic also strengthened its bottom line, since it maintained its pricing power throughout the crisis as restaurants scrambled for delivery options.
Analysts expect DoorDash's revenue to rise 222% to $2.85 billion for the full year when it posts its fourth-quarter earnings on Feb. 25. But next year, they expect its revenue to rise just 30% as the pandemic passes.
Based on those growth rates, DoorDash trades at 17 times next year's sales, which gives it a lower price-to-sales ratio than many other high-growth tech stocks. However, investors should take those estimates with a pillar of salt, because no one is sure when the pandemic will end.
If the pandemic drags on throughout most of 2021, DoorDash could easily beat Wall Street's conservative estimates. But if it ends in the first half of the year, DoorDash's growth could miss analysts' expectations as it goes up against tough comparisons to 2020.
DoorDash could also lose its pricing power as restaurants regain the upper hand, and reignite its margin-crushing pricing war against Uber (UBER 4.41%) Eats and Grubhub (GRUB). Simply put, the uncertain outcome of the pandemic makes it difficult to tell if DoorDash's stock is cheap or expensive.
2. Its upcoming lock-up expirations
DoorDash's first lock-up expiration will occur shortly after the release of its fourth-quarter earnings report in late February. That expiration will allow its insiders to sell a percentage of their shares if the stock is still trading above $127.50. DoorDash's management and board members can sell up to 20% of their shares in that first wave, while its other insiders can sell up to 40%.
Its second lock-up expiration, which will occur either 180 days after its IPO or after the release of its first-quarter earnings report (whichever is earlier), will free up the rest of DoorDash's shares. Those expirations could spark violent sell-offs throughout the year.
3. Tighter regulations
DoorDash -- like its gig-based peers Uber, Lyft (LYFT 6.56%), and Grubhub -- has often been criticized for its low wages and lack of benefits.
DoorDash ended its controversial practice of subsidizing delivery fees with customer tips amid a broad backlash in 2019, but it remains the target of frequent protests from "gig economy" workers.
DoorDash still faces pressure to reclassify its Dashers from contractors to employees across several states, while President Joe Biden and many Democrats currently support the PRO Act, which could force all gig platforms to implement those changes nationwide.
With the Democrats now controlling the presidency and both houses of Congress, the PRO Act now has a shot of being signed into law. If that happens, DoorDash and its industry peers could face an existential crisis as their workers unionize to demand higher wages and benefits.
4. The competition
DoorDash controlled 50% of the U.S. food delivery market last October, according to Edison Trends, while Uber Eats (including Postmates) and Grubhub held shares of 33% and 16%, respectively.
However, Uber isn't afraid to subsidize its unprofitable Eats business with its higher-margin ride-hailing revenue. Meanwhile, Just Eat Takeaway's (JTKWY 7.13%) planned buyout of Grubhub could also breathe fresh life into the former market leader, since it could support its expansion in the U.S. with its growth in Europe and other markets.
In other words, the food delivery wars haven't ended in the U.S. yet. Going public could also have weakened DoorDash's competitive position, since it can no longer rely on private funding to bludgeon its rivals with aggressive promotions. Instead, it will face pressure to continue narrowing its losses -- which could be difficult as the pandemic passes, its revenue growth decelerates, and the competition heats up again.
So where will DoorDash's stock be in a year?
I predict these challenges will cause a volatile year for DoorDash. Its stock could slump when the pandemic passes and its lock-up period expires, and it could struggle as regulators further scrutinize gig economy platforms.
Therefore, DoorDash's stock might rise this year, but I don't think it will outperform the broader market. Instead, it could struggle to justify its valuation even as pricier stocks with fewer headwinds climb ever higher.