The DoorDash (DASH -2.01%) business model seemed tailor-made to thrive during a pandemic. Delivering restaurant orders to homes when in-person dining was halted was an excellent business.
Yet despite surging revenue, DoorDash struggles to operate profitably. That could explain one of its red flags in 2022: shareholder dilution. Investors have taken a pessimistic view of the delivery business, and the stock is down 54% off its high.
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Green flag: surging revenue
Customers and revenue surged for DoorDash at the pandemic's onset. Folks, restricted from visiting their favorite restaurants, were forced to order delivery. Sales increased by 226% in 2020 to $2.9 billion. That's not as surprising as the momentum it sustained throughout 2021. DoorDash grew sales again, this time by 69.4% to reach $4.9 billion.
I say a surprise because restaurants were allowed to bring back diners on-premise in 2021. So DoorDash's sustained momentum amid economic reopening is impressive. It highlights the significant value consumers place on the convenience of rapid delivery. The service is not cheap, especially if you measure it by the percentage of order value. Still, it removes a significant barrier for customers who want a meal but are unable or unwilling to go to the establishment and pick it up themselves.
That said, booming customer demand might be because DoorDash's pricing is not high enough, which brings me to its red flag in 2022.
Red flag: shareholder dilution
While sales jumped by $2 billion in 2021, DoorDash's bottom line did not improve. Even as revenue increased from $2.9 billion to $4.9 billion, the net loss increased from $458 million to $463 million.
DoorDash's cost of revenue rose by nearly $1 billion and sales and marketing by $700 million over the prior year. The company's primary cost of revenue is payments to "Dashers," who pick up and deliver customer orders. Interestingly, it spends money on marketing to attract customers and attract Dashers in the increasingly competitive environment to retain labor.
To help pay for the losses, DoorDash is diluting shareholders. At the end of last year, DoorDash's weighted average shares outstanding increased from 62.4 million to 336.8 million.
Why is this a red flag? Each share is now entitled to a smaller percentage of the business. For instance, if DoorDash earns $100 million in profits next year, it will be split among 336.8 million instead of 62.4 million shares, resulting in smaller earnings per share.
The losses on the bottom line and the shareholder dilution can partly explain why the stock is down 54% off its high. It could indicate that the pricing of its services is unsustainable and that increases are inevitably on the horizon. Then the risk becomes how consumers will respond to higher prices and how far demand will fall. Nevertheless, consumers love convenience, and price increases may result in a more sustainable business, even if it means slower revenue growth.
