DoorDash: For Aggressive Investors Only

Lots of growth from this technology-driven delivery service, but so far, no profits

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May 31, 2023
Summary
  • DoorDash has built technology platforms that allow it to connect merchants, consumers and independent contractors.
  • To make the business model work, the company must keep investing heavily in technology and in marketing.
  • Despite the lack of profits, 11 gurus have invested in the stock.
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The inspiration for local delivery service DoorDash Inc. (DASH, Financial) came from a lucky chance. A comment was overheard by four students from Stanford University who were developing a technology app for small businesses. As they were getting feedback from owners, one commented that her toughest problem was deliveries. The four described the moment in a 2013 article for Medium.com:

“Just as we were about to leave, Chloe bursted out, 'Well, there is one thing I wanted to show you.' She took out a thick booklet. It was pages and pages of delivery orders. 'This drives me crazy. I have no drivers to fulfill them and I’m the one doing all of it.'"

As the old saying goes, the rest is history. In the past 10 years, DoorDash has become a publicly traded company with a market cap of $26.20 billion and 2022 revenue of $6.583 billion. Obviously, this is a hot growth company, but is it a good investment?

Skeptics have many reasons to stay away. After all, it has been a public company for only a couple of years, although data from 2018 and forward is available. It is currently losing money and its earnings per share are negative. However, it has relatively low debt thanks to successful fundraising efforts.

Financial strenth

DoorDash receives a GuruFocus ranking of 8 out of 10 for financial strength. That’s based on factors such as its Altman Z-Score of 4.92. At the end of 2022, it had cash, cash equivalents and marketable securities worth $3.9 billion. At the same time, it reported having an accumulated deficit of $3.8 billion. Nevertheless, the company claims it has enough liquidity to meet its working capital and capital expenditures through at least the end of 2023 and perhaps beyond.

Profitability

Turning to profitability metrics, the company has a gross margin of 45.63%, while the operating and net margins are -14.35% and -18.99%, respectively. Why the losses? As this income statement from the first-quarter 2023 earnings release shows, DoorDash spends more than it brings in:

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For the first quarter of 2023, it had a loss from operations of $171 million and a net loss of $145 million. To become profitable, it must find reductions in its sales/marketing, research and development or general administrative costs.

Higher revenue would no doubt help, but note how it increased by $579 million in 2023 and total costs jumped by $577 million in the same time. When costs and revenue increase in lockstep, by roughly the same amount, a company cannot grow into profitability.

The three-year growth rates for revenue, Ebitda and earnings per share without non-recurring items underline that fact. The chart below shows how DoorDash has been able to grow its revenue, but not its bottom line:

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Will there be opportunities to reduce its costs? Perhaps. The company considers itself to be a technology company, not a food company. That’s because it thinks in terms of the platforms it develops for taking and handling orders.

There is a possibility it will reach a point where it can reduce its R&D and marketing as the platforms become more mature. However, as Joe Michalowski of Mosaic has noted, the company is caught in a “continuous cycle of investment and expansion.” This reminds me of the continuous capital expenditures of the telecommunications sector.

That cycle can deliver market share (DoorDash currently has more than 50% of the market) and economies of scale. On that subject, chief operating officer Christopher Payne explained the path to profitability to Forbes magazine in 2020. He argued that the greater the scale, the more efficient the business. Payne went on to say that it takes time for markets to scale up, and some of DoorDash’s earlier initiatives were generating profits. Still, it has scaled up immensely since 2020, and profits remain elusive.

Over the past three years, the company has not paid a dividend, but it did repurchase $400 million worth of shares in 2022. That’s an interesting choice for a company that is not profitable, though it is still a net issuer of shares, so it may just be trying to do some damage control on stock option compensation for executives.

Valuation

Given its short history as a public company, there isn’t much data with which to assess DoorDash’s valuation. The share price has been headed downward since November 2021, when the bear market began. One could argue an unprofitable stock is always overvalued.

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Nevertheless, at the end of the first quarter, 13F filings showed that 11 of the gurus followed by GuruFocus held the stock. During the quarter, five gurus made DoorDash a new holding, three added to their positions and three reduced them. The three biggest guru holdings as of the quarter's end were those of Baillie Gifford (Trades, Portfolio) (9,726,604 shares), Frank Sands (Trades, Portfolio) of Sands Capital Management (8,955,755 shares) and Jim Simons (Trades, Portfolio) of Renaissance Technologies (1,472,443 shares).

Institutional investors had a modest holding, 45.4% of shares outstanding, and insiders held 0.71%. CEO and co-founder Tony Xu held 535,025 shares as of Dec. 2020.

Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.

In my opinion, aggressive investors who are willing to spend a few years waiting may find the stock attractive. For the rest of us, though, I believe taking a pass is the prudent decision.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure