DoorDash's (DASH -0.93%) stock price jumped 8% on Nov. 4 after the company posted its third-quarter earnings report. The food delivery service provider's revenue rose 33% year over year to $1.7 billion, accelerating from its 30% growth in the second quarter and beating analysts' estimates by $70 million. Its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) rose 1% to $87 million. But on a GAAP (generally accepted accounting principles) basis, its net loss widened from $101 million to $296 million, or $0.77 per share, which missed the consensus forecast by $0.12.
DoorDash's growth rates seemed to satisfy investors, but its stock remains roughly 50% below its IPO price and nearly 80% below its all-time high. Let's review the bear and bull cases to see if its stock is still worth buying.
Image source: DoorDash.
What the bears will tell you about DoorDash
The bears believe DoorDash will remain deeply unprofitable by GAAP measures. One major headwind is its stock-based compensation, which rose 71% year over year to $609 million (or 13% of its total revenue) in the first nine months of 2022. Those expenses reflect DoorDash's dependence on stock bonuses to conserve its cash, as well as its acquisition of the Finnish delivery start-up Wolt in a 7 billion euro ($6.9 billion) all-stock transaction this June.
As a result, DoorDash's number of outstanding shares rose 10% year over year in the first nine months of the year -- even though it repurchased $400 million in shares this year (at higher prices) to partly offset that dilution.
It's generally a red flag when an unprofitable company buys back its own shares at elevated prices merely to offset its own stock-based compensation. That cash would arguably have been better spent on other investments to grow its core business. DoorDash's insiders also seem eager to liquidate those shares: Over the past 12 months, they sold more than twice as many shares as they bought.
DoorDash also hasn't proven its business model is sustainable yet. It still can't break even by charging its current fees, and it's doubtful it can significantly raise those fees as inflation curbs the spending power of the average consumer.
The bears will also question DoorDash's ability to survive the Biden administration's recent proposal to require all ride-hailing and delivery platforms to reclassify their drivers from independent contracts to full-time employees. During the conference call, CEO Tony Xu said the vast majority of its Dashers "preferred staying as independent contractors," but CFO Prabir Adarkar admitted those regulations could introduce new "onerous" costs that "cannot be entirely optimized away."
What the bulls will tell you about DoorDash
The bulls will point out that DoorDash remains the market leader in the U.S. food delivery market by a wide margin, and that it continues to grow rapidly. In the third quarter, its total orders grew 27% year over year to 439 million, accelerating from its 23% growth in the second quarter. Its marketplace gross order volume (GOV) rose 30% to $13.53 billion, compared to its 25% growth in the previous quarter, and it expects that figure to rise 25%-27% year over year in the fourth quarter.
That robust top-line growth, which was partly driven by its integration of Wolt, indicates DoorDash's business model is still well insulated from inflation. During the conference call, Adarkar said the company was well equipped to weather those headwinds because "people eat regardless of what's happening to inflationary pressures." As a delivery platform, DoorDash isn't directly exposed to rising food prices like restaurants are. It also probably isn't too concerned about high fuel prices, since it scrapped its temporary fuel surcharge back in May.
That's why its net revenue margin rose 40 basis points year over year to 12.6% in the third quarter, while its contribution profit margin (as a percentage of its marketplace GOV) grew 40 basis points to 3.1%. Its adjusted EBITDA margin (as a percentage of its marketplace GOV) dipped 20 basis points to 0.6% as it ramped up its investments, but the midpoint of its fourth-quarter guidance implies that margin will bounce back sequentially to 0.7%.
Lastly, analysts still expect DoorDash's revenue to rise 33% this year and grow another 20% to $7.8 billion in 2023. Based on those estimates, DoorDash's stock looks cheap at just 2.6 times next year's sales. Its rival Uber Technologies might look cheaper at 1.5 times next year's sales, but it operates a massive ride-hailing business alongside its food delivery platform and is expected to generate slower revenue growth than DoorDash in 2023.
Which argument makes more sense?
I believe DoorDash's revenue will continue to rise as it gains more diners and locks them in with its subscription-based DashPass service. But I still don't see how its business can ever turn profitable on a GAAP basis -- and that glaring issue will make it an unappealing investment as long as interest rates continue to rise. Therefore, I still can't recommend buying DoorDash's stock now -- especially when more balanced and sustainable growth stocks are still on sale.
