DoorDash (DASH 2.09%) made a huge splash late last year with its IPO. The company raised $3.4 billion in fresh cash, and shares soared on the first day of trading. But things have calmed down following the fourth quarter 2020 report card, which indicated activity on its apps will drastically moderate this year as vaccines roll out and effects of the pandemic start to ease.
Though the stock is now down 25% from where it debuted in public trading, I'd exercise caution before jumping in, even at these levels.
Why the hype?
It's easy to see why some investors are excited about DoorDash. In its fourth-quarter update (its first as a public concern), DoorDash reported a 226% year-over-year increase in revenue to $970 million. Adjusted EBITDA was $94 million, compared to a loss of $104 million in the year-ago period. As a percentage of gross order value (GOV), EBITDA profit margins were 1.1% in the quarter compared to negative 4.1% the year prior.
In total, 2020 was an epic year for DoorDash as restaurants turned to to the platform to survive, and consumers opted for delivery while stuck at home and practicing social distancing.
|
Metric |
2020 |
2019 |
Change |
|---|---|---|---|
|
Revenue |
$2.89 billion |
$885 million |
226% |
|
Adjusted EBITDA |
$189 million |
($475 million) |
N/A |
|
Free cash flow (including acquisitions) |
$65 million |
($874 million) |
N/A |
Data source: DoorDash.
Also worth noting: DoorDash had $4.86 billion in cash and equivalents at the end of 2020, offset by just $364 million in convertible debt. As it expands into new segments like grocery and convenience store delivery, this enviable war chest will come in handy.
DoorDash thinks it can convert many more small and local businesses to its platform with easy tools for said businesses to launch a webpage so consumers can place orders online. Many restaurants already opted in during the pandemic, but grocers and other small merchants have yet to get updated for the times. A new digital era is dawning, and consumers increasingly expect to be able to conduct business via the internet.
Image source: Getty Images.
It pays to be patient with IPO stocks
But not everything is perfect with DoorDash. There's been worry that the company's epic growth in 2020 could moderate dramatically once the pandemic's end appears on the horizon. Management substantiated that claim in its fourth-quarter report. GOV for DoorDash was $8.2 billion during the final months of the year, and the metric was forecast to notch an impressive sequential increase to a range of $8.6 billion to $9.1 billion in the first quarter of 2021 -- not bad.
Things get a little more foggy for the full-year 2021 forecast, though. GOV is expected to fall in a range of $30 billion to $33 billion. That implies a decline in GOV after the first quarter -- the final period before DoorDash begins to lap the initial effects from COVID-19 last spring. As revenue is based on order activity in its marketplace, DoorDash's growth could actually end up declining this year.
Perhaps it will wind up performing better than forecast, or maybe growth will resume in 2022. But at over 14 times enterprise value (market cap plus debt and minus cash on the balance sheet) to trailing 12-month revenue, I think DoorDash's price tag is too high given the uncertain outlook. This isn't exactly a high-margin operation. If the company does shrink in size, there's a good chance it'll dip back into the red on the bottom line.
The industries DoorDash serves don't have a lot of wiggle room either. Food retail -- especially on a small local scale -- is also a low profit margin industry. The complex fees DoorDash charges restaurants and their customers could have been justifiable in tough times but not so much as consumer activity normalizes.
There's also competition and not just from other delivery services out there. Companies like Square and Wix.com also offer website building tools to enable online ordering. Add a delivery driver or two to payroll, and a local business could (somewhat) replicate what DoorDash offers -- or just opt to go it alone without delivery services if consumers start picking up orders or dining in again.
I'm not saying there's no value in what DoorDash offers. The company is doing its part to help local commerce get up to speed with the times, and for many of them, keeping DoorDash as a partner will likely continue to make sense for them. But the price tag on this IPO stock is too rich for my blood given management's expectation for activity to moderate or decline this year. Exercise caution before buying.
