Title: Skyrocketing Stock: A 309% Gain from 2022 Low - Why Buy and Cautions to Consider
With 2024 almost wrapping up, the S&P 500 is teetering on the brink of delivering its second consecutive year of more than 20% growth. The grueling 2022 bear market seems like a distant memory now. DoorDash (DASH -2.07%), the food delivery giant, has bounced back admirably from its 2022 lows, boasting a 309% surge, thanks to robust revenue growth, enhanced profitability, and expansion into various sectors. However, it's still 28% short of its 2021 record high.
Is the momentum set to continue? Let's delve into two compelling reasons to invest in DoorDash and one circumstance that warrants caution.
DoorDash's Revenue Engine Roaring
To grasp DoorDash's operations, we need to focus on Marketplace Gross Order Value (GOV). This figure signifies the total customer spend on the platform, including food, delivery fees, tips, and service charges. When a customer orders from a restaurant, GOV comprises the value of the food and DoorDash's commission.
During the third quarter of 2024, the company posted an all-time high of $20 billion in GOV, translating to a record $2.7 billion in revenue. Despite the 19% year-on-year growth of GOV representing the slowest quarterly pace in 2024, revenue soared by 25%, marking the fastest quarterly increase. This impressive feat was achieved by improving Net Revenue Margin, which grew from 12.9% to 13.5% in the same quarter of 2023. This was a result of enhanced efficiency, particularly in logistics operations, enabling DoorDash to pocket considerable portions of its GOV.
Additional revenue came from heightened advertising spending by businesses utilizing DoorDash's platform to market their products. This money flowed straight into DoorDash's coffers. While extracting more money from each order is commendable, the primary strategy to boost revenue lies in expanding the pie. DoorDash is effectively accomplishing this by branching out beyond food delivery and into groceries and retail products. Over 100,000 retailers, including heavyweights like JD Sports and Ulta Beauty, are now integrated with DoorDash.
DoorDash's CEO, Tony Xu, reveals that the company is still in its infancy stages of this retail shift, which paves the way for significant growth potential.
Profitability Climbing Steadily
Crucially, DoorDash has become more financially prudent in recent times, aiming to cushion its business from the harsh economic conditions exemplified by high inflation and interest rates. It departs from its earlier go-big-or-go-home strategy, which resulted in sky-high losses.
In Q3, DoorDash only ramped up its Operating Expenses by 14% compared to the previous year, reaching $2.6 billion. Cost of revenue, which forms the bulk of its operating expenses due to delivery driver payments, has remained relatively stable as a percentage of revenue.
With Q3 revenue increasing by 25% and expenses growing by just 14%, more resources streamlined towards the bottom line. Subsequently, DoorDash recorded a net income of $162 million, clocking in its first GAAP-compliant profit since inception.
While the traditional Price-to-Earnings (P/E) ratio isn't applicable since DoorDash only recently started reporting GAAP profits, we can employ the Price-to-Sales (P/S) ratio, which divides its market capitalization by its trailing 12-month revenue. At present, DoorDash shares trade at a P/S ratio of 7.1, which surpasses its average P/S ratio of 4.8 from the past three years, excluding the abnormal valuations seen in 2021.
Comparatively, Uber Technologies (UBER 1.63%), a competitor, posts a P/S ratio of 3.27x, suggesting that, despite DoorDash's success, its stock may be overvalued.
The Warning Sign: Valuation Concerns
While the bullish picture above is undeniable, it's fair to question the stock's current valuation. Given that DoorDash has only just started generating a GAAP profit, traditional P/E valuations are irrelevant. However, we can assess the stock's P/S ratio of 7.1, a premium compared to its historical and industry averages.
For instance, a P/S ratio of 7.1 is nearly double that of Uber Technologies, a more diversified competitor with robust segments like ride-hailing and commercial freight. Uber generated a whopping $11.2 billion in revenue during its recent quarter, quadrupling DoorDash's revenue.
Additionally, Uber is collaborating with 14 autonomous vehicle developers, setting the stage for a future that could significantly improve its economics.
Therefore, DoorDash stock might be an attractive long-term investment option for those willing to hold it for half a decade, enabling the company to absorb its current valuation. Shorter-term investors may benefit from considering alternatives, such as Uber.
Investing in DoorDash could be a promising move given its surging revenue and recent profitability, as demonstrated by the company's record-breaking Q3 performance. However, one should cautiously consider the stock's current valuation, which appears to be higher than its historical and industry averages, potentially making it a longer-term investment opportunity. In terms of finance and money, DoorDash's strategic focus on expanding its revenue sources and improving operational efficiency have significantly contributed to its financial growth.
