Is DoorDash Stock’s Valuation As High As It Looks?
Food delivery startup DoorDash went public earlier this month and saw its stock soar from its IPO price of about $102 to levels of around $160 currently, with its market cap standing at about $51 billion – making the company more valuable than major restaurants including Chipotle and Yum Brands. Is this valuation justified? While DoorDash has seen demand for its services soar through Covid-19, garnering roughly half the U.S. delivery market, we still think the company is quite overvalued at current levels, and estimate its fair value at closer to $90 per share. See our interactive analysis DoorDash Stock: Expensive Or Cheap? for more details on what’s driving our price estimate for the company and how its key metrics stack up versus peers. Parts of the analysis are summarized below.
How Does DoorDash Make Money?
DoorDash primarily makes money by charging restaurants a commission based on the total dollar order value and also charges a fee to consumers for using its platform. The company also generates revenue from membership fees paid by consumers for its subscription service – DashPass and by charging per-order fees to merchants that use its logistics to service orders under its Drive third party program. DoorDash’s Gross Order Value – or the total value of orders placed on its marketplace – grew from around $2.8 billion in 2018 to $8 billion in 2019. We expect it to rise to about $24 billion in 2020, as Covid-19 caused orders made on the platform to surge almost 3x over the first nine months of the year. The company’s Total Revenue has grown from around $0.3 billion in 2018 to about $0.9 billion in 2019 and is likely to jump to about $2.8 billion this year.
What’s DoorDash Worth?
We value DoorDash at about 10x projected 2020 Revenues, translating into a total valuation of about $28 billion or about $88 per share. While this multiple is well ahead of Grubhub, which trades at about 3.6x projected Revenue, and Uber which trades at around 7.1x, DoorDash justifies this multiple for a couple of reasons.
Firstly, growth has been much stronger, with Revenue on track to grow about 200% each year between 2018 and 2020. This compares to annual growth rates of about 34% for Uber, 85% for Lyft, and 39% for Grubhub over the last two years. Secondly, DoorDash has also cut its losses, as its Revenues have expanded much more quickly than its cost base. Operating Margin rose from about -72% in 2018 to levels of about -7% over the first nine months of 2020. In comparison, Grubhub and Uber still remain deeply lossmaking.
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Moreover, DoorDash has innovated and has been quick to spot trends in the fast-growing delivery space. For instance, it doubled down on suburban markets – which typically have larger orders and lower costs compared to large cities translating into better profitability. It holds about 58% market share in the suburbs. DoorDash’s subscription program, DashPass, has also been a success, signing up about 5 million customers, or about 28% of the company’s estimated 18 million monthly users. In comparison, Uber’s subscription offering is used by less than 2% of its total base (both ride-hailing and food delivery).
What Are The Risks?
We think DoorDash’s current market price of about $160 per share (over 18x estimated 2020 Revenue) is too high for a couple of reasons. Firstly, it’s highly likely that the company’s era of hyper-growth is behind it. As highly effective Covid-19 vaccines have started to roll-out, the end of the pandemic – which is likely a once in a lifetime event that helped delivery volumes – appears to be in sight. As people return to restaurants, demand for delivery could moderate, impacting Revenues and profits in the sector. Secondly, the delivery market is also intensely competitive and there is little to differentiate the major players other than delivering food at the lowest price possible. There are no real switching costs for users, who often use multiple apps. While DoorDash’s contracts with most of the largest U.S. restaurant brands and its subscription offering help it to an extent, it doesn’t fully mitigate the risks for the company.
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