DoorDash (NYSE:DASH), the largest third-party food delivery company in America, went public at $102 per share last December. The stock opened at $182 on the first day, continued rallying, and eventually hit a 52-week high of $256 this February.
However, those who chased DoorDash's rally were burned as investors rotated from growth to value stocks over the past few months. Concerns about rising bond yields, inflation, and tough year-over-year comparisons for the so-called "pandemic stocks" sparked that sell-off, which knocked DoorDash's stock back to the $160s and erased most of its post-IPO gains.
But at these levels, investors might be wondering if it's time to buy the stock again. After all, DoorDash remains the market leader in the U.S., and there's still robust demand for its services among restaurants and diners. Let's see if it's still a worthy investment.
How did DoorDash win the delivery war?
Two years ago, DoorDash overtook Grubhub as the top food delivery platform in the U.S. with three main strategies.
First, DoorDash was built from the ground up as a logistics company that helped restaurants launch their own delivery services. Grubhub initially only listed restaurants that provided their own delivery services.
Grubhub's approach limited its growth, so it eventually acquired smaller delivery platforms and expanded its own logistics network to keep pace with DoorDash and Uber (NYSE:UBER) Eats. However, Grubhub's inorganic growth strategy was more expensive, more complicated, and less cohesive than DoorDash's simpler business model.
Second, DoorDash focused on gaining customers in cities that Grubhub didn't dominate yet. As a result, Grubhub maintained its lead in New York City but lost other major metro markets to DoorDash.
Third, DoorDash remained private for much longer than Grubhub, which went public in 2014. As a result, DoorDash continued to attract private equity investments and didn't have to worry about its stock price or profitability, which enabled it to aggressively expand and challenge Grubhub with promotions.
How fast is DoorDash growing?
DoorDash controlled 57% of the U.S. food delivery market in May, according to Second Measure. Uber Eats and Postmates, which merged last December, controlled 21%, while Grubhub held a 17% share.
DoorDash's revenue surged 226% to $2.89 billion in 2020, accelerating from its 204% growth in 2019 as its total orders more than tripled to 816 million throughout the pandemic. It also generated an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $189 million for the full year compared to a loss of $475 million in 2019.
By comparison, Grubhub's revenue rose just 39% to $1.8 billion last year, and its adjusted EBITDA actually declined 41% to $186 million.
DoorDash's momentum continued in the first quarter of 2021. Its revenue surged 198% year over year to $1.1 billion; its total orders more than tripled again; and it posted an adjusted EBITDA of $43 million compared to a loss of $70 million a year ago.
What problems could DoorDash face?
DoorDash's growth rates are astounding, but it expects its growth to decelerate after the pandemic ends. Analysts expect its revenue to rise 45% this year and 21% next year.
Based on those estimates, its stock trades at 13 times this year's sales. The bulls will argue that's a reasonable price-to-sales ratio compared to those of many of the market's frothier hyper-growth stocks.
However, DoorDash could face fresh challenges from Just Eat Takeaway (NASDAQ:GRUB), the European food delivery giant that just gobbled up Grubhub for $7.3 billion. Just Eat believes Grubhub will complement its Canadian business, and it could try to boost Grubhub's market share again with loss-leading strategies.
In other words, a pricing war could be on the horizon. Restaurants could also gain the upper hand in negotiating fees in a post-pandemic world, while diners could be less willing to pay high delivery fees.
DoorDash claims it can expand overseas to continue growing. It's already entered Canada, Australia, and Japan, but it still generated 99.6% of its revenue from the United States last year. It plans to deliver more products, such as groceries and pet products, but that's a capital-intensive strategy that could pit it against retail giants like Amazon and Walmart.
DoorDash also faces ongoing pressure to raise its wages and reclassify its Dashers from independent contractors to employees. If those changes take place, the company's operating expenses will skyrocket.
All these challenges could make it harder for DoorDash to ever generate a generally accepted accounting principles (GAAP) profit. Its net loss narrowed from $668 million in 2019 to $461 million in 2020 and narrowed year over year from $129 million to $110 million in the first quarter of 2021. But it won't turn profitable anytime soon.
There are better growth stocks to buy
DoorDash's long-term outlook is still too murky for my tastes. It fared well during the pandemic, but I'm not confident in its ability to expand overseas, become a diversified logistics platform for other products, or overcome the looming labor challenges. Its stock seems reasonably valued, but there are plenty of promising growth stocks that offer better stability at lower valuations.