Stock Analysis & Ideas

DoorDash Stock: Worsening Headwinds on the Horizon?

Story Highlights

DoorDash has struggled to form a bottom ahead of a potential recession. With Amazon breaking into the food-delivery world, things could easily go from bad to worse for the online food-delivery service provider as it tackles its own slate of idiosyncratic issues.

Shares of food delivery platform and pandemic beneficiary DoorDash (DASH) can’t seem to catch any relief, as of late. At writing, the stock is down just over 71% from its all-time highs of around $250 per share. With a potential recession in 2023, DoorDash grapples with one of its most challenging environments yet. Indeed, 2020 had some of the biggest tailwinds on record.

Could 2022 hold to the polar opposite, as consumers look to cut their budgets?

In recent years, food delivery has become a habit for many shut-in consumers. It could be a tough one to kick, even as COVID-19 lockdowns become a thing of the past. Regardless, many may opt to eat out for the summer to enjoy a lack of restrictions before a potential fall resurgence of COVID-19.

It feels like the pandemic is over. And it may very well be winding down. However, the BA.5 variant of Omicron remains a major threat that could keep demand for food delivery relatively elevated.

In any case, DoorDash may need catalysts to bounce back from one of its worst sell-offs as a publicly-traded entity. An economic slowdown does not bode well for the food-delivery giant, nor does Amazon’s (AMZN) entry into the food delivery market. Further, inflationary pressures could weigh down margins over the foreseeable future.

Though DoorDash stock has become cheap in recent quarters (shares trade at just 5.4 times sales), there are reasons why it’s cheap. The underlying economics of food delivery has been put to the test amid the latest wave of headwinds, which may not be quick to dissipate. For now, I am bearish on DASH stock.

On TipRanks, DASH scores a 1 out of 10 on the Smart Score spectrum. This indicates a potential for the stock to underperform the broader market.

DoorDash Stock: How Will it Grapple With a Recession?

Luxuries like food delivery are easy cuts when times get tough, and money-saving efforts among consumers surge. Though the firm reported solid sales growth, with a decent contribution margin in the first quarter, things could turn on a dime, as the consumer sentiment begins to fade.

To make matters worse, DoorDash could find it difficult to retain drivers, as it does away with its fuel surcharge, a direct response to the recent surge in prices at the pump. Although energy prices have pulled back considerably off their highs, many drivers are still likely to feel the pressure of higher prices eating into their incomes.

According to Business Insider, certain DoorDash drivers have been rejecting a big chunk of orders following the conclusion of the $5 per 100-mile relief payment to help drivers cope with higher costs of fuel.

DoorDash may have ended its surcharges a tad early. With oil prices fluctuating between $95-105, there may need to be a more substantial pullback before the economics of being a “Dasher” can improve towards pre-pandemic levels.

While DoorDash and other food-delivery platforms are likely to take share away from dine-in restaurants over the long run, grocery stores could take the place of ordering in if a recession were to hit.

Fortunately, a lot of recessionary headwinds seem to already be baked into the stock. And if the coming economic contraction is mild as some pundits expect, DoorDash may actually have a bit of room to the upside, as transitional inflationary pressures pass and demand is given a chance to pick up again.

Amazon’s Push into Food Delivery Should be Concerning to DoorDash Investors

Amazon is a mega-cap disruptor that’s continuing to spread its wings into new markets. Recently, the e-commerce behemoth bought a 2% stake in food-delivery firm GrubHub. In a new agreement, Amazon Prime members in the U.S. now get a complimentary year of GrubHub+.

Undoubtedly, the deal is bad news for DoorDash. Prime is one of the stickiest subscription services out there, and many DoorDash users will take their business over to Grubhub. As Amazon looks to grow its presence in food delivery, DoorDash may have to team up with another big-league tech firm to make it through a competitive onslaught.

Today, DoorDash enjoys network effects, but if Amazon wants to go after its customers and drivers, nothing appears to be stopping it. Amazon can take a big margin hit and lose considerable sums of cash with its food delivery expedition. DoorDash may not be able to keep up unless it teams up with another provider of a broad range of services.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, DASH stock comes in as a Moderate Buy. Out of 21 analyst ratings, there are 11 Buy recommendations, and 10 Hold recommendations.

The average DoorDash price target is $105.32, implying an upside of 48.07%. Analyst price targets range from a low of $67 per share to a high of $185 per share.

The Bottom Line on DoorDash Stock

Recessionary and inflationary headwinds are a major concern. However, it’s competitive pressures from Amazon that has me most concerned. In the future, Amazon may decide to significantly increase its stake in GrubHub and offer food delivery as a perk in a higher tier of Prime.

For now, DoorDash finds itself between a rock and a hard place. And I’m not so sure how the firm will pivot to retain its dominance in the not-so-profitable business of food delivery.

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