The primary goal of a business is to generate profits, right?
Many start-ups seemingly forgot this principle over the last 15 years, especially during the pandemic-fueled market bubble of 2021. A poster child of unprofitability has been DoorDash (DASH 0.42%), a food delivery service that has exploded in popularity over the last few years. Even though the company processes tens of billions of dollars in customer orders every year, operating losses continue to pile up and in fact have only gotten worse in recent quarters. Undeterred by these losses, the executive team stated in their latest quarterly letter that the delivery platform it is building will create shareholder value (i.e., generate profits) over the long term.
Should investors trust that DoorDash management is building a profitable enterprise for the future? Or is food delivery just an unsustainable business model?
Steady growth, despite pandemic headwinds
Certain key performance metrics for DoorDash looked strong in its recent quarterly report. Total orders grew 27% year over year to 512 million, while gross order volume grew 29% to $15.9 billion. This led to revenue growing by a solid 40% year over year to $2 billion. Over the longer term, this growth looks even more impressive. In the first quarter of 2020, right before the pandemic boosted demand for online marketplaces, DoorDash's revenue was just $362 million.
That means its revenue has grown by more than 5.5x in just three years. Many investors were worried that demand for food delivery platforms like DoorDash would go down once the pandemic lockdowns ended and people started dining in restaurants again. So far, this risk has not materialized. Even with the pandemic behind us, DoorDash is putting up 40% year-over-year top-line growth.
DoorDash is looking to keep up this growth by continuing to invest in its restaurant segment and by expanding into adjacent shopping categories. The key ones are grocery, alcohol, and convenience stores. These categories overlap with food delivery (for example, someone might get some beers with their Friday night meal) and could provide another tailwind of growth that further enhances the value of the DoorDash marketplace for its customers.
The problem: When will the company stop losing money?
If you just looked at volume and revenue growth, DoorDash would look like an easy buy, especially with the stock down 62% since going public. Time to blindly buy the dip, right?
Well, there is a bit more to this story. Even though revenue growth has been solid, DoorDash has yet to generate positive operating profits over any trailing-12-month period. The company has large variable costs on every order -- making up 50% of revenue in the first quarter -- and spends 25% of its revenue on sales and marketing to attract and retain its customer base. Add on research and development costs and general administrative overhead and DoorDash posted a $171 million operating loss in Q1.
Take a look at the below chart. These losses have only gotten worse since the company went public. In order to stem these losses, DoorDash will need to reduce its sales and marketing spend, which has the possibility of killing its impressive-looking revenue growth. It is easy to sell a dollar for 90 cents and call yourself a growing business. However, achieving growth while also turning a profit is a tougher task.
DASH Operating Income (TTM) data by YCharts
The stock is not cheap
At a current market cap of $26 billion, DoorDash trades at 3.6x its trailing revenue. This is higher than the average stock in the S&P 500, which has a price-to-sales (P/S) ratio of 2.34. Of course, DoorDash is growing much quicker than the average company, which could bring down its P/S.
But again, you shouldn't take profitability out of the equation. DoorDash has never proven it can earn a consistent profit, which should not be taken lightly by any prospective shareholder. Taking this into consideration, it is surprising to see DoorDash trade at a premium P/S compared to the S&P 500 average.
There is a lot of uncertainty when buying shares in an unprofitable company, and if DoorDash fails to turn around its income statement, there is likely a lot more downside for shareholders over the next few years.
