DoorDash (NYSE: DASH) is set to report its fiscal first-quarter earnings on Thursday after the bell. The food-delivery company has been one of the biggest pandemic winners, as people have ordered food more than ever to protect themselves from COVID-19 – and avoid cooking. But with the pandemic nearing its conclusion, DoorDash’s best (growth) days may be behind it.
To be clear, there appears to be more growth in DoorDash’s future, but shares are trading at 10.7x forward sales in a low-margin industry. It’s going to take a lot of growth and margin expansion for DoorDash to make sense at a nearly $40 billion valuation.
It is going to be a tough road ahead, but it’s not impossible.
DoorDash is Growing Quickly… But a Slowdown is Coming
In the fourth quarter, DoorDash’s revenue surged 226% yoy to $970 million, beating the consensus of $938 million. Gross order value (GOV) was $8.2 billion, up 227% yoy. The company’s first-quarter guidance called for GOV of $8.6 billion to $9.1 billion, higher than expectations of $8.3 billion. So far, so good.
DoorDash’s full-year guidance wasn’t as rosy; the company is expecting GOV of $30 billion to $33 billion, falling short of consensus estimates of $33.2 billion. The midpoint of the full-year guidance coupled with the fiscal first quarter guidance assumes that DoorDash’s average GOV for the final three quarters of 2021 will be $7.55 billion. That is lower than the actual fourth quarter and expected first quarter GOV.
That’s not what you want to hear, but it’s also understandable. People will turn to food delivery a lot less in a post-COVID world.
The problem is that a slowdown will only make it harder to turn a nice profit. In the fourth quarter, DoorDash’s adjusted EBITDA was $94 million, just above expectations. For full-year 2021, DoorDash is expecting adjusted EBITDA to be between zero and $200 million, lower than Wall Street estimates of $246 million.
For DoorDash to trade at a somewhat reasonable 15x adjusted EBITDA, it would need to see an increase of more than 10x from the high-end of its 2021 adjusted EBITDA guidance.
But DoorDash Already Has a High Market Share
When DoorDash went public in December, it had a 50% share of the US food delivery market. That sounds great… until you realize that it means DoorDash doesn’t have a lot of room for growth in the food delivery market.
This isn’t Carvana (NYSE: CVNA), an e-commerce platform for buying and selling used cars, that handles one out of every 157 used car transactions. A company like Carvana is just scratching the surface, justifying its status as a high-flying growth stock.
Even if DoorDash had 100% share of the US food delivery market, it would still need further growth to justify its valuation.
That leaves a few paths for DoorDash to grow into its valuation:
- The food delivery industry gets bigger.
- The company finds a way to expand its margins… a lot.
- DoorDash starts delivering other items.
We might see the food delivery industry get bigger in the coming years, but it’s hard to imagine it getting much bigger than it was in 2020, a perfect storm for food delivery. So, that’s an unrealistic path towards $2.5 billion in adjusted EBITDA.
Moving to the second path, food delivery is typically a low-margin business. People don’t want to pay that much to have their food delivered, and minimum wages are only increasing. Some have suggested that DoorDash could use self-driving cars to lower its costs, but that seems like a pipedream.
The third path seems the most realistic. What if DoorDash leverages its delivery network to deliver things besides food? It makes sense, but how many things do people really need immediately. Retailers are already capable of providing same-day delivery. Are people really willing to pay a premium to have their accessories delivered in an hour? That’s a big maybe.
How Should You Play DoorDash?
DoorDash IPO’d back in December 2020 at $102 a share, but shares opened at $182 a share. Since then, it’s been a rollercoaster for shareholders.
As you can see, shares are right around their lows, making it tempting to get in ahead of earnings. With the pandemic still altering day-to-day life, DoorDash likely had a strong first quarter.
But you’re playing with fire if you buy DoorDash shares. A lot of things would have to go right for this company to grow into its valuation, let alone past its valuation. And if revenue growth and margins don’t see a lot of improvement in 2022? Look out below.
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