DoorDash (NASDAQ: DASH) was one of the most highly sought-after initial public offerings in 2020. Investors got their third look at earnings on August 12, 2021. If after-hours trading is any indication, investors don’t like what they are seeing. DASH stock is down 6.75%.
The food delivery company posted higher revenue than expected. The $1.24 billion was 83% higher than the prior quarter and well above the $1.08 billion forecast by analysts. However, the company also posted a larger than expected net loss of $102 million, which on a per-share basis came out to negative 30 cents per share which was significantly higher than the loss of 20 cents per share that analysts expected.
Prior to earnings, the analyst community was predicting DASH stock to drop overr 9%. In the next 12 months. At first glance, there’s no reason for that outlook to change.
The novelty of food delivery has worn off. And that means analysts are beginning to evaluate these companies on their own merits. And that kind of comparison may not play well for DASH stock. One reason for this comes from the company’s financials.
DoorDash is not yet profitable, so we’ll take a look at the company’s price-to-sales ratio (P/S ratio) and compare it to that of rivals Uber (NYSE: UBER) and Just Eat Takeaway.com (NYSE: GRUB).
When you do, you can see that DoorDash has a P/S ratio (as of this writing) of 15.75. That’s almost twice the P/S ratio for Uber (8.03) and more than double that of GrubHub (6.35). That suggests that DASH stock is overvalued.
However, we are operating in an environment where value is not necessarily measured in profitability, but in what investors are willing to pay. The problem that I see for DoorDash is that the same factors that could propel its growth in the short term could also make the stock a mediocre long-term investment.
The Bullish Case for DASH Stock
The economic recovery is underway. And that’s good news for DoorDash and other food delivery companies that rely on a strong economy. By any metric, consumers are paying a premium to use their service. In fact, the service itself is a surcharge on top of the price of the food and the tip.
So for food delivery companies to thrive, the price of that surcharge must remain small enough to justify the convenience. In the case of DoorDash that surcharge could be as low as $1.99 or as much as $5.99 depending on the restaurant and the order.
That’s a fee that will be easily absorbed by most individuals, particularly since it’s paid at the time they order their food. And as more individuals return to work, you can see demand for food delivery services to rise.
Then there’s the Delta variant of the novel coronavirus. Although this is unlikely to be a long-term catalyst, in the short term it will likely be a lift to food delivery services.
However, the real catalyst for DoorDash and other food delivery services is if they can truly become mainstream. The pandemic has created a strong push to “normalize” at-home grocery delivery. The question is if this is altering consumer behavior or leaning into what consumers have wanted all along.
The Bearish Case for DASH Stock
Let’s say that food delivery does become an expanded part of our new normal. Let’s even go further and say that some restaurants decide that rather than fight higher labor costs that carry-out and delivery become the only viable options to remain in business.
While that would seem to favor DASH stock, it’s not too hard to make a counterargument. The food delivery sector is getting more crowded by the day. And if food delivery expands beyond its current level, there’s no moat protecting the sector from becoming even more crowded. Furthermore, if restaurant chains did go this route, they would likely employ their own delivery service and cut out the middleman.
If you don’t believe me, look at DoorDash itself which is rumored to be looking into entering the grocery delivery space.
Plus, there is some evidence that the economic recovery may be more fragile than it appears. If that is indeed the case, then customers may not be as willing to pay a surcharge for food they can easily pick up themselves.
Don’t Hurry to Buy DASH Stock
From a technical standpoint, DASH stock may be ready to burst to the upside. However, it’s not going to get anywhere near its 52-week high. That’s the nature of IPOs. But traders aren’t buying DASH stock for its fundamentals, but for its long-term story.
That story may be bullish, but it could just as easily be bearish. It’s better to wait until you have a better sense of which way it’s going.
Before you consider DoorDash, you'll want to hear this.
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