DoorDash (DASH 1.09%) stock came public at the end of 2020 at $102 per share. The initial public offering (IPO) was perhaps slightly opportunistic, considering its food delivery business was benefiting greatly from pandemic-era lockdowns and social restrictions.
The company was consistently delivering triple-digit-percentage growth in its revenue, so it's no surprise the stock soared to an all-time high of $246 in less than a year following its IPO. But conditions have since changed, and they are no longer as favorable for DoorDash despite it remaining the most popular food delivery platform in America with a 67% market share.
DoorDash stock is now trading 52% below its all-time high, amid a significant deceleration in its revenue growth as the company focuses on managing costs to achieve profitability. It made significant progress during the recent first quarter of 2024 (ended March 31), so why did investors send its stock tumbling following the results?
DoorDash is focusing on the details
DoorDash employed a growth-at-all-costs strategy at the height of the pandemic, which was a smart move because of the opportunity-rich environment. But it was also a costly one; the company lost $929 million at the bottom line during 2020 and 2021 combined. It then proceeded to lose a further $1.36 billion in 2022 when social conditions returned to normal, which led to a sharp slowdown in revenue growth.
DoorDash has focused on efficiency ever since. It carefully managed its operating costs throughout 2023, and successfully narrowed its net loss to just $558 million as a result. The company also launched the biggest update to its mobile applications since they launched, which gave users the ability to build separate shopping carts for restaurants (food delivery), groceries, and retail products.
The retail segment is of great importance to DoorDash's future growth, because the addressable market is substantially larger than that of food and groceries as it captures more products. In April, DoorDash announced a partnership with Lowe's that allows customers to order home improvement products from more than 1,700 locations across America through its platform. Lowe's joins more than 150,000 non-restaurant stores that have signed up to DoorDash so far.
Beyond expanding its addressable market, DoorDash is also increasing the efficiency of its logistics network. E-commerce giant Amazon recently discovered that consistently delivering orders either same day or next day leads to an increase in purchase frequency from customers. Therefore, this is a great way for DoorDash to squeeze more revenue from its existing services without spending exorbitant amounts of additional money.
Revenue growth continues to decelerate, but profitability is in sight
Moderating or cutting costs -- especially in areas like marketing -- has consequences. DoorDash generated $2.5 billion in revenue during the first quarter, which was a record high, but it represented growth of just 23% compared to the year-ago period. It was the slowest pace of growth since the company came public in 2020, and the deceleration has been a consistent trend since then:
On a more positive note, DoorDash grew its operating costs by just 16.7% during Q1, which was obviously a slower rate of increase than its revenue. That allowed more money to flow to the company's bottom line, and as a result, it generated a net loss of just $25 million, which was a substantial reduction from its $167 million net loss in the year-ago period.
Unfortunately, that net loss was roughly double what Wall Street expected, which is why DoorDash stock tumbled 18% immediately after reporting its results. However, the company is now clearly a stone's throw away from true profitability under generally accepted accounting principles (GAAP).
Moreover, DoorDash often refers to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) as its preferred measure of profitability, because it strips out most one-off and noncash expenses. For example, DoorDash spent $252 million on stock-based compensation during Q1, which detracts from its earnings under GAAP accounting rules.
DoorDash's adjusted EBITDA came in at $371 million during Q1, which was an impressive 81.8% year-over-year increase. It's further evidence of the company's continued progress on the profitability front.
DoorDash stock is still relatively expensive
Despite the 52% decline in DoorDash stock from its all-time high, it's still quite expensive. Based on the company's trailing-12-month revenue of $9.1 billion and its market capitalization of $47.7 billion, the stock trades at a price-to-sales (P/S) ratio of 5.2.
Compare that to Uber Technologies, the parent company of Uber Eats, which competes closely with DoorDash. That company has generated $37.3 billion in revenue over the last four quarters, and with a market capitalization of $150.3 billion, its stock trades at a P/S ratio of just 4.
Plus, Uber's investors get the benefit of a globally dominant ride-hailing business and a growing commercial freight business, in addition to GAAP profitability. The point is, it's difficult to justify paying a higher P/S valuation for DoorDash compared to Uber, when Uber has a more diverse business, it's making money, and it could also benefit from powerful tech revolutions like autonomous ride-hailing in the long term.
Is DoorDash stock a buy now? I think the company is making fantastic progress on the profitability front, but until it's clear where its revenue growth will settle post-deceleration, buying in today might carry a little more risk than most investors are comfortable with. It might be best to observe from the sidelines for a few more quarters.
