There was a lot of excitement leading up to the DoorDash (NYSE:DASH) IPO in December. But all that excitement delivered an unappetizing share price. The volatile DoorDash stock trades around $210 as of this writing, giving it a valuation of $67 billion.
The company has been growing rapidly as more consumers rely on the convenience of food delivery amid pandemic-induced restaurant closures. It's also managed to gain market share from rivals Uber (NYSE:UBER) and GrubHub. It seems likely a lot of customers will make food delivery a regular part of their takeout routine even in a post-pandemic world.
But with shares trading at a premium to Uber, investors interested in capitalizing on the growth in food delivery may be better suited buying the more diversified competitor.
A look at valuation
DoorDash has grown sales quickly in 2020 as consumers have come to rely on food delivery during the pandemic. Revenue more than tripled in the first nine months of 2020, and analysts believe sales maintained that growth rate in the fourth quarter. For the full year, Wall Street expects the company to report $2.85 billion in revenue. That gives the stock a price-to-sales ratio of around 23.6.
Uber, meanwhile, has seen overall revenue decline as its core mobility business has suffered. Uber Eats helped offset the decline, but it's not growing at quite the same pace as DoorDash. Delivery revenue doubled in the second quarter, increased 125% in the third quarter, and accelerated even further in the fourth quarter to 224% with the addition of Postmates in December. Uber's total business brought in $11.1 billion in 2020, giving it a trailing price-to-sales ratio of about 10.1, less than half that of DoorDash.
Investors may argue DoorDash deserves a premium valuation due to its smaller size and faster growth, but Uber should return to strong growth this year as its mobility business benefits from renewed activity in the second half of 2021. Analysts project full-year 2021 revenue of $16.2 billion, up 45%. Meanwhile, DoorDash could see a negative impact from reopening. As a result, the market expects a severe slowdown this year with sales up just 30%.
On a forward-looking basis, the disparity in the price-to-sales ratio difference between DoorDash and Uber is even greater: 18.2 times versus 6.9 times.
To be sure, DoorDash deserves some premium over Uber. It has a larger market share, which is extremely important in the delivery business due to the value of the network effect. It's also a smaller company overall, which gives it more room for growth. But at today's price, all of that growth potential is already baked in.
Uber's diversification is an advantage
While DoorDash's concentration on restaurant delivery has enabled it to grow quickly in 2020, it may be a disadvantage long term.
As people begin to travel or go out to bars again (thus needing a safe ride home), Uber is poised to increase its install base. During its fourth-quarter earnings call, CEO Dara Khosrowshahi said, "I think that it's increasingly become apparent that Uber, as a transportation platform, is recovering faster than other transportation offerings in most of the markets in which we operate." The user base should come back stronger than it was pre-pandemic.
Uber moved to integrate Uber Eats with its main app in 2019, which proved valuable last year but could be even more valuable in the future. It's already seeing traction converting riders to Eats customers. The redesigned app brought in 10% first-time "eaters" as the company calls its Uber Eats customers. With its toes in grocery, alcohol, and prescription delivery as well, Uber has an opportunity to convert customers coming to its app for one service to more frequent users generating additional revenue.
The same thing works on the driver side. Uber is able to attract drivers more easily than DoorDash or any other competitor due to the number of opportunities it can offer them on its platform. From rides to Eats to delivery, drivers will get more work from Uber than its competitors.
This network effect is seen in Uber's expanding take rate for delivery. For the fourth quarter, Uber had a take rate of 13.5% for the delivery business. That's up about four percentage points from last year. Uber focused the business this year in markets where it's either first or second and exited markets where it didn't have significant market share or the ability to leverage its network effect. By comparison, DoorDash's take rate sits around a similar level with older customer cohorts earning a slightly higher take rate. That's despite the fact that DoorDash has a significant market share lead over Uber in the U.S.
Uber ought to be able to continue expanding its take rate as it wins back ride-share customers. And with faster overall growth in gross bookings across its businesses than DoorDash, it should see faster improvement in its operating income as well. With shares trading at a far lower valuation, Uber is the better investment right now over the high-flying IPO.
This article represents the opinion of the writer, who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.