Is It Too Late to Buy DoorDash Stock?

DoorDash's (DASH 1.06%) stock surged 12% on Nov. 10 after the online food delivery company posted its third-quarter earnings report and revealed its plans to buy Wolt, a Finnish delivery start-up, for about $8 billion in stock. DoorDash's third-quarter revenue rose 45% year-over-year to $1.3 billion, which beat estimates by $90 million. But its net loss widened from $43 million last year to $101 million, and its net loss of $0.30 per share missed expectations by three cents. Its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) stayed flat at $86 million.

Those results indicated DoorDash could continue to grow on top of its pandemic-induced growth spurt in 2020. However, its expected takeover of Wolt, which provides delivery services in 23 countries, gained a lot more attention for its ability to accelerate DoorDash's overseas growth. Should investors consider buying DoorDash before that deal closes in the second half of 2022? Or is it a bit too late to buy this high-flying stock?

Image source: DoorDash.

How fast is DoorDash growing?

DoorDash overtook Grubhub as the top food delivery platform in the U.S. back in 2019. According to Bloomberg Second Measure, DoorDash controlled 57% of the domestic market in October. Uber (UBER -0.07%) Eats (which also owns Postmates) ranked second with a 26% share, while Grubhub ranked a distant third with a 16% share.

The company's growth in marketplace gross order volume (GOV) and revenue decelerated over the past few quarters as the COVID-19 restrictions were relaxed and more restaurants reopened. But, it's still generating double-digit revenue growth on top of its triple-digit revenue and total orders growth last year:

Source: DoorDash. YOY = Year-over-year.

For the fourth quarter, DoorDash expects its marketplace GOV to grow 26%-30% year-over-year. Analysts expect its revenue to rise 30% in the fourth quarter and increase 66% for the full year. But next year, they expect DoorDash's revenue to grow just 22% as its post-pandemic slowdown continues. Although, its proposed acquisition of Wolt suggests those estimates might be too low.

How will Wolt strengthen DoorDash?

Wolt generated $330 million in revenue in 2020, and it serves more than ten million users. It hasn't disclosed its growth rates for this year yet.

DoorDash generated $2.9 billion in revenue in 2020, and analysts expect it to generate $4.8 billion in revenue this year. If Wolt grew at the same rate as DoorDash over the past year, then it might generate about $550 million in revenue this year. In other words, buying Wolt could boost DoorDash's annual revenue by more than 10%. The company expects Wolt to become accretive to its GOV growth immediately after the deal closes.

DoorDash has been expanding overseas with operations in Canada and Australia, but it still generated 99.6% of its revenue in the U.S. in 2020. Buying Wolt -- which primarily operates in Europe, Japan, and Israel -- would significantly accelerate that overseas expansion. It would also widen DoorDash's moat against Just Eat Takeaway (JTKWY -0.67%), the European food delivery giant that gobbled up Grubhub earlier this year.

But what about DoorDash's bottom-line growth?

DoorDash's gross margin fell 120 basis points year-over-year to 52.2% in the third quarter, while its adjusted EBITDA margin also declined 310 basis points to 6.7%. Those declines indicate DoorDash and its peers are losing their pricing power as more restaurants reopen. It expects that pressure to continue with an adjusted EBITDA of $0 to $100 million in the fourth quarter. At the midpoint, that would represent a significant decline from its adjusted EBITDA of $94 million a year ago.

In the first nine months of 2021, DoorDash's net loss widened year-over-year from $149 million to $313 million. Wolt booked a net loss of $38 million in 2020, and it's probably still unprofitable. Therefore, aquiring Wolt could boost DoorDash's revenue and expand its international presence, but it will also squeeze its margins and possibly result in wider losses. On a pro forma basis, DoorDash expects the combined company to generate between $0 and $500 million in adjusted EBITDA in 2022 -- which is a pretty vague and unhelpful forecast.

The all-stock deal, which values Wolt at about 24 times its 2020 revenue, will also likely dilute DoorDash's own shares. It's smarter than spending its own cash, but DoorDash's number of weighted average shares have already consistently risen since its IPO last December.

Is it too late to buy DoorDash?

DoorDash is winning the food delivery war, but its growth is decelerating and it still lacks a viable path toward profitability. It plans to gradually evolve into a logistics platform for non-food deliveries, but it could struggle to stay relevant in a market dominated by retail and e-commerce giants.

The company's stock isn't too expensive at 12 times next year's sales, so it isn't too late to buy the stock if you believe it can achieve its long-term goals. However, I personally wouldn't invest in DoorDash because its growth is slowing, its margins are slipping, and its losses are widening.