DoorDash Is Down 40%, Here's Why It Still Isn't a Buy

Stocks of U.S. food delivery leader DoorDash (DASH -2.01%) hit an all-time high of $257 in November, shortly after it announced the $8.1 billion acquisition of Wolt, an international last-mile delivery company. But the lofty gains were short-lived, with the stock falling by 40% in the last month alone. 

DoorDash was a market darling during the pandemic, as the stay-at-home economy drove a surge in demand for food delivery services. Restaurants needed customers, and consumers wanted their favorite foods, so DoorDash was critical in bridging that gap.

But a notable deceleration in the company's growth rate suggests it likely won't see such a perfect operating environment ever again. Therefore, despite a hefty decline, its stock still might be too expensive. 

Image source: Getty Images.

The race to the bottom

Platform technology companies like DoorDash often find it difficult to defend their concepts from competitors, as they're rather simple and inexpensive to replicate. If consumers are presented with a handful of platforms that do the same thing, the price might be the only difference-maker, and that triggers a race to the bottom as competitors jostle to earn business. 

Anyone who's ever used a food delivery service, probably knows there's no shortage of options, leaving little incentive to remain loyal to just one provider. In fact, a recent third-quarter survey found that 22% of DoorDash customers also ordered from GrubHub, and 21% also ordered from Uber's UberEats. 

Naturally, as DoorDash is the leading platform in the U.S., a larger share of those competitors' customers (39%) also placed orders with DoorDash. However, that leadership position might prove to be fragile if the company decides to exert some pricing power -- if it tries to make more money, GrubHub and UberEats could swoop in and snatch more customers.

That's one reason DoorDash has failed to generate a profit, even with soaring revenue in the seemingly perfect operating environment during the pandemic.

The great deceleration

As time goes on, it's becoming evident that 2020 might've been the company's peak year for growth. 

Data source: DoorDash, Yahoo! Finance. YOY = year over year.

When zooming in to observe just the last year, the rapid decline in growth rate becomes even more apparent.

Data source: DoorDash. YOY = year over year.

Additionally, DoorDash's gross order volume (GOV) -- the dollar value of orders its customers have placed -- has grown stagnant in 2021. In the first quarter, it was $9.9 billion, and in the most recent quarter, it was $10.4 billion, representing growth of just 5%. 

Even in the face of slowing growth, both revenue and GOV remain at all-time highs for the company. But that uncovers a deeper issue; on a trailing-12-month basis, DoorDash has made a net loss of $625 million. 

Why investors shouldn't buy the stock

DoorDash has so far failed to convert its pandemic success to the bottom line, which has investors rightfully questioning whether it will ever generate a profit. To circle back to the competition argument from earlier, part of the problem is the money DoorDash needs to spend to retain existing customers and acquire new ones.

Over the last 12 months, the company spent $1.6 billion on sales and marketing alone, a whopping 104% more than the $759 million it spent in the prior 12-month period. Given revenue growth for 2021 is expected to be just 69%, that doesn't feel like a great return for the additional expenditure.

DoorDash is trying to expand into new areas to make its business more competitive, but it remains to be seen whether this will result in a profitable enterprise. Its acquisition of Wolt opens up new markets in Europe, where DoorDash has little presence, and also grows its offering from only food and groceries into other retail consumer products -- markets that are much larger in size. 

Although right now, with a very high forward price-to-sales multiple of 10.8 and no earnings in sight, DoorDash might still have room to fall. By comparison, Uber's stock trades at a forward price-to-sales multiple of 4.8, and that company has a swath of other exciting businesses attached to it.