Food delivery company DoorDash (DASH +1.10%) released its latest quarterly results on May 5. The good news was the business continued to generate strong growth with revenue rising 35% year over year to $1.46 billion.
However, the numbers weren't all great. There are three red flags and warning signs investors should pay close attention to.
Image source: Getty Images.
The company is incentivizing its Dashers less
A key metric DoorDash reports is "gross order value" (GOV) on its marketplace, which represents the total value of orders customers are placing with restaurants and other merchants on its platform. DoorDash collects a percentage of this as its revenue. For the first three months of 2022, it reported marketplace GOV of $12.4 billion, up 25% year over year. What's notable is revenue grew at a much faster rate of 35%.
Data source: Company filings. Chart by author.
DoorDash says part of the reason for this discrepancy was that the incentives it offered its Dashers (delivery providers) were more modest than they were a year ago, back when there was a shortage in couriers.
This can be problematic, because amid the Great Resignation and people shedding jobs in exchange for better-paying opportunities, the company could potentially face a shortage of workers in the future. And with inflation continuing to be a problem, that only exacerbates the issue. On the flip side, if the company does increase incentives, that could lead to underwhelming revenue growth.
The company's first-quarter results were inflated by the change in incentives, which can give investors a false impression of where the business is today and how it might perform in the future.
Expenses outpaced revenue growth
Even with the strong revenue numbers in Q1, the top line still didn't keep up with rising costs. Operating expenses of $1.63 billion increased 39% from the prior-year period. And despite the increase in revenue and gross profit, DoorDash's loss expanded this past quarter. Here's a breakdown of how it landed further in the red.
Data source: Company filings. Chart by author.
The danger for investors here is that if there's a slowdown in demand, these losses could grow deeper in future quarters.
DoorDash burned through $20 million in cash
Another problem is that over the past three months, DoorDash's operating cash burn was $20 million. A year ago, it was generating $166 million of positive cash flow from its day-to-day operations.
Data source: Company filings. Chart by author.
The company blamed the timing of payments for this reversal and says it still expects to generate positive free cash flow this year. And the positive for investors here is that the business has ample cash with liquidity of $4.2 billion from its cash and equivalents.
DoorDash isn't running out of money anytime soon, but poor cash flow could limit its ability to invest in growth opportunities down the road. It's not a huge problem right now, but it is something investors should keep an eye on going forward.
Investors are better off avoiding DoorDash for now
DoorDash stock has fallen more than 55% since the start of 2022, significantly worse than the 16% decline of the S&P 500.
NASDAQ: DASH
Key Data Points
Food delivery may be a luxury many consumers can no longer afford as prices for essential day-to-day goods continue to increase. And that's why it wouldn't surprise me to see this growth stock continue to fall in the months ahead.
