DoorDash's (DASH 0.21%) stock closed at an all-time high of $245.97 last November. But today, the food delivery company's shares trade at about $70 -- more than 30% below its IPO price of $102 in December 2020.
DoorDash lost its luster for two simple reasons. First, its growth cooled off in a post-lockdown world as people started dining out again. Second, rising interest rates drove investors away from unprofitable growth stocks which were trading at unsustainable valuations. DoorDash remains unprofitable on a GAAP (generally accepted accounting principles) basis, and it was trading at 17 times its 2021 sales at its peak valuation last November.
Image source: DoorDash.
But today, DoorDash's stock trades at just four times this year's sales. It also remains the top food delivery platform in the U.S. with a 59% market share in June, according to Bloomberg Second Measure. Its closest competitors, Uber (UBER +3.61%) Eats and Just Eat Takeaway's (JTKWY +0.00%) Grubhub, controlled 24% and 13% of the market, respectively.
However, three recent developments also indicate it could still be too early to turn bullish on DoorDash. Let's take a closer look at these red flags.
1. Amazon's deal with Grubhub
Just Eat acquired Grubhub last June, but it now faces intense pressure from activist investors to divest the struggling American subsidiary. Just Eat was exploring a sale of Grubhub earlier this year, but it failed to find any buyers -- even after it reportedly slashed its asking price from its original purchase price of $7.3 billion to less than $1.3 billion.
That wasn't surprising, considering that Grubhub failed to capitalize on its early lead in the food delivery market and fell far behind DoorDash and Uber over the past three years. However, Amazon (AMZN 0.78%) recently stepped in and struck a new deal with Grubhub.
On July 6, Amazon announced that all of its U.S. Prime members will receive a free one-year membership to Grubhub+ -- its monthly membership plan that provides free deliveries for orders over $12, exclusive discounts, free food, and other perks. On its own, Grubhub+ costs $9.99 a month.
Amazon will also receive warrants that represent 2% of Grubhub's shares, and potentially receive another 13% of its shares if Prime delivers enough customers to Grubhub. DoorDash's stock tumbled 7% after that announcement, while Just Eat Takeaway's shares surged 14%.
Approximately 166 million consumers in the U.S. are already Prime subscribers, according a recent PYMNTS survey. By comparison, DoorDash ended 2021 with 25 million monthly active users and 10 million DashPass members, who also pay $9.99 a month for similar perks as Grubhub+.
If Amazon's Prime members start to take advantage of their free Grubhub+ subscriptions, it could generate painful headwinds for DoorDash -- which is already expected to generate much slower growth in 2022 and 2023.
NASDAQ: DASH
Key Data Points
2. Inflationary headwinds
Inflation, which currently hovers near a 40-year high, will also squeeze DoorDash's entire business. Rising fuel prices are making it difficult for its Dashers to earn sustainable wages, and higher food prices are causing restaurants to raise their prices -- which could cause customers to think twice before paying additional fees and tips for third-party deliveries.
DoorDash added "gas rewards" to its orders to help its drivers offset higher fuel costs back in March, and it plans to extend those rewards through August. However, those higher fees could alienate its customers, and many drivers are still complaining that the rewards don't fully offset their higher gas prices.
During DoorDash's latest conference call in May, CFO Prabir Adarkar admitted it was "hard to tell exactly what impact inflation is having on order volume and on consumer engagement," and that it "chose to absorb" the costs of its gas rewards for Dashers instead of passing them on to consumers -- which suggests its near-term margins will decline if gas prices continue to rise.
3. Regulatory headwinds
Lastly, DoorDash still faces pressure in several states, most notably California and Massachusetts, to reclassify its drivers from independent contractors to employees so they can become eligible for better wages and benefits.
DoorDash, Uber, and other ride-sharing and delivery companies have poured millions of dollars into ballot initiatives to block those measures. However, this battle could eventually spread to other states, and major overseas markets like Australia -- which DoorDash is gradually expanding into -- have also taken major steps toward regulating "gig economy" companies.
If DoorDash is eventually forced to reclassify a large portion of its Dashers as employees, its margins will likely crumble and its net losses will widen.
Is DoorDash too cheap to ignore?
DoorDash looks a lot cheaper than it did last year, but it's no longer a hypergrowth stock. Analysts expect its revenue to grow 26% this year and 24% in 2023, but for its bottom line to remain deep in the red.
It's fairly easy to find bigger blue-chip tech companies that generate comparable sales growth, bring in steady profits, and trade at similar valuations after the tech sector's steep sell-off over the past year. DoorDash's downside potential might be getting limited at these levels, but I think these three red flags could discourage investors from betting on a quick turnaround.
