Shares of food delivery service provider DoorDash (DASH) have been steadily climbing back from the brutal crash endured over the last few months.
With a ~70% fall from peak to trough now behind it, DoorDash has some intriguing catalysts on the horizon that could extend its recent relief rally. After surging over 55% from its March bottom of around $74 per share, shares are currently sitting at $116 and change per share, thanks in part to the broader rally in unprofitable and expensive speculative tech stocks.
While nothing has changed about DoorDash’s lack of GAAP profits, I do think the risk/reward has become much better, even as the company continues facing difficult comparisons year-over-year as pandemic tailwinds fade.
Although the reopening of the economy is perceived as a terrible thing for food-delivery firms like DoorDash or Uber (UBER) Eats, I think many are severely discounting the staying power of both services in the post-pandemic environment. Further, both firms have a realistic onramp towards profitability that may not be as far off as some skeptics expect.
Recent Headwinds May Be Overblown
DoorDash has seen its pandemic tailwinds be replaced by post-lockdown headwinds in what seemed like an instant. Surging oil prices and labor woes are just a few of the recent headwinds facing DoorDash and Uber. Although they are real negatives, they seem more transitory in nature and are likely to pass over the coming weeks and months as conditions look to normalize.
In any case, I am turning bullish on shares of DoorDash amid its recent relief rally. The stock seems way too cheap at 8.3 times sales. Further, DoorDash has shown that it’s leading the charge in the local logistics market.
Food Delivery Service Demand Could Outlast the Pandemic
Undoubtedly, one of the biggest deterrents for those looking to invest in food delivery companies is the potential for decaying demand in a post-pandemic environment. When everybody is returning to the physical realm, fewer people will be ordering food via DoorDash.
The great economic reopening seems unstoppable at this point. Still, I think it’s a mistake to conclude that DoorDash will suffer the same fate as another pandemic beneficiary like Peloton (PTON), which crumbled violently, shedding over 88% of its value from peak to trough under the intense selling pressure. Indeed, it was a sharp and sudden reversal of fortunes for the bid-up pandemic stocks.
The at-home consumer only has enough room in the house for so many stationary bikes or treadmills. Arguably, they have a massive appetite for food delivered hot and on time, even as it becomes safer to venture outside again.
In its latest quarter, DoorDash revealed robust demand for food delivery. It’s not falling nearly as fast as you’d think. Why? Locked-down consumers have made ordering food a habit over the course of a year and a half.
Although restaurants are now increasing capacity, many still can’t get enough of the convenience offered by the food delivery firms. It’s sticky — far stickier than I would have thought going into DoorDash’s fourth quarter.
Demand for Food Delivery? It’s Still Robust
Gross order volumes for Q4 rose 36% year-over-year and 7% sequentially. That’s impressive, especially in the face of less-favorable year-over-year comparables. Still, investors just are not happy with stocks that aren’t making considerable sums of cash with rates on the rise.
Moving ahead, we’ll find out just how sticky DoorDash’s services are, as the reopening takes it to the next level. Suppose demand remains robust, and DoorDash helps its couriers navigate through nearer-term headwinds (like higher prices at the pump). In that case, the company seems well on its way to becoming a sustainably profitable company at some point over the next two years.
What about the Odds of a Recession?
Although DoorDash can add to its strengths from the pandemic, the major sore spot could be what happens if the economy falls into a downturn. Worse, stagflation could deter many from paying up for the convenience of food delivery, incentivizing money-saving alternatives like grocery shopping and creating one’s own food.
Currently, a U.S. yield curve inversion (a top recession signal) seems imminent. Though, a soft landing cannot be ruled out, given the U.S. Federal Reserve’s previously dovish sentiment. Such a soft landing could be less detrimental to a firm that offers “nice-to-have” services like food delivery. Still, a prolonged “hard landing” could prove detrimental to such a discretionary service provider.
DoorDash: Still Leading the Charge in Innovation
Finally, DoorDash is still innovating, which should help it retain its strong network effects in the face of new rivals. In the competitive business of food delivery, people want selection, but more importantly, they want their food as fast as possible.
DoorDash already has its selection down, with a large number of restaurant chains aboard. Now, DoorDash wants to cut its delivery times and disrupt grocery delivery with the Ultra-Fast Grocery effort in New York.
Such ultra-fast delivery, which cuts down delivery to 15 minutes or so, could raise barriers significantly for competitors. If DoorDash invests heavily in such ultra-fast delivery services, I wouldn’t be surprised if it pulled an Amazon (AMZN) by squeezing out rivals at the expense of near-term margins en route to a more dominant market share.
Wall Street’s Take
Turning to Wall Street, DASH stock comes in as a Moderate Buy. Out of 16 analyst ratings, there are nine Buy recommendations and seven Hold recommendations.
The average DoorDash price target is $164.21, implying an upside potential of 40%. Analyst price targets range from a low of $118.00 per share to a high of $230.00 per share.
The Bottom Line on DoorDash Stock
There’s a lot to love about DoorDash, including its valuation. It’s still innovating, and early signs show that food-delivery demand is far more resilient coming out of the worst of pandemic lockdowns.
With a lot of innovation going on behind the scenes, I’d give DoorDash the benefit of the doubt. It has staying power and a realistic ramp into the realm of GAAP profitability.
Pending a recession or stagflationary environment, DoorDash seems like a convenience that’s hard to pass up come dinner time for those with ample discretionary income.
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