It's easy to assume the worst of DoorDash (DASH -2.01%) as an investment opportunity. Although the coronavirus pandemic has increased use of the restaurant delivery service, shares are down 27% from their first-day closing price in December, and they're off nearly 50% from the all-time high hit early this year. Last quarter's earnings beat snapped the stock's sell-off, but the share price has remained stagnant since that day's surge. Profits are still elusive for the company despite incredible revenue growth -- investors have been burned by similar stories in the past.
While it remains to be seen when or even if DoorDash can get and stay in the black, at the stock's present price, there's enough hope for certain investors to take a shot.
Creativity doesn't pay the bills
Quick! What do Groupon, GoPro, Fitbit, Blue Apron, and Lyft have in common?
If you said they all turned into poor investments, you're right. There's a more specific answer to the question though. That is, all of them ultimately overpromised and then underdelivered, failing to live up to their original hype. DoorDash admittedly looks to be of the same ilk, aiming to convince restaurants and their diners that it deserves a commission -- anywhere from 6% to 30% -- for selling and then delivering meals to hungry customers. Groupon, Uber Technologies, and Lyft have particularly struggled to make their similar business models pay off.
Image source: Getty Images.
DoorDash is a bird of a different feather, however. Despite its seemingly high costs to utilize, the company is profitably scalable, flexible, defensible, and economically sustainable for all involved parties. All four are necessary attributes of a business model if a company is to last.
Many of the market's most touted unicorns turned publicly-traded companies missed on at least one of those marks.
Think about it -- Groupon was able to drive customers to a local business with an incredible daily deal coupon. But the business itself had little control over the number of customers looking to take advantage of an offer that in many cases was a loss-leader. Many of these small businesses were forced to close, forcing Groupon to adjust its approach. The new, more muted business model isn't nearly as explosive as its original one was.
GoPro's flaw was a misunderstanding of actual demand for its product. No one denies it makes the best action camera in the world. However, very few people actually need such a high-end technological toy. There was never going to be much scale to its business despite the hype.
As for Blue Apron, sure, the COVID-19 contagion prompted lots of people to start cooking more at home. Meal kits delivered by mail are prohibitively expensive for many consumers, however. It's considerably cheaper and far more flexible to simply buy ingredients from your local grocer, many of which offer their own pre-packaged meal kits now. There's nothing particularly unique about meal kits anymore.
You get the big idea, now look deeper. A bunch of highly touted start-ups had investors too enamored by the coolness of their concept to recognize the flaws in the long-term business model.
DoorDash checks off all the boxes
DoorDash isn't bulletproof, of course. It has its own challenges too. Uber is in the food delivery business as well, and restaurants are pushing back on the delivery service's cost.
But DoorDash is on the right track, and it isn't facing an imminent derailment. First and foremost, the business can be profitably scaled. In fact, it has to be scaled up if the company is to survive. It's doing so, though, while improving profitability as it expands.
Consider last quarter's results. While revenue nearly tripled, its cost of revenue -- the biggest single expense -- didn't swell quite as much. Sales and marketing costs as well as administrative costs only doubled year over year. This all led to stronger profit margins, and there's every reason to believe those rates will continue to improve as the company grows ( analysts certainly do). It's too soon to say the same of Uber and Lyft.
Data source: Thomson Reuters. Chart by author.
DoorDash's business is also defensible.
Yes, more competition is moving into the restaurant delivery business. DoorDash's chief defensible edge, however, is its app allowing restaurants to accept online orders while DoorDash itself works out the pickup and dropoff logistics. It's super simple, and while pricing has been a stumbling block, the new pricing plan laid out in April offers restaurateurs options that help them control their costs in a way that makes sense for them. It's not hyperbole to say this new setup positions the delivery outfit as more of a partner and less of a service provider.
As for flexibility, while the organization's roots are in the restaurant delivery business, it's monetizing its tech in other ways. Case in point: the company's DashMart offers delivery service from nearby retail stores. It's still the early innings for this non-food delivery business, but the fact that high-profile outfits like Macy's and PetSmart are already partners speaks volumes.
Yes, it's a buy ... for the right investor
DoorDash's business model may have legitimate earnings prospects, but we can only guess as to when they'll materialize. Everything is in flux, and even if the company does what it's supposed to, this highly watched stock may or may not behave as one would expect. That's just the nature of young companies and even younger stocks.
If you can stomach the volatility, though, DoorDash's backstory and potential are certainly compelling enough.
