Food-delivery leader DoordashÂ (NYSE:DASH) made its debut on Dec. 9 at an opening price of $192. On the same day, Doordash stockÂ hit a record high of $195.50. Now it is flirting with $140. Put another way, in a matter of three weeks, the stock has lost about 23% of its value.
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Doordash priced its IPO at $102, a higher number than the originally forecast $90-$95 per share. Now investors are wondering if the shares could possibly fall towards that original IPO price.
Todayâ€™s article discusses what investors can expect from Doordash stock in the early part of 2021. If you do not yet own the shares, before buying them, you may want to wait for them to decline further toward $120. At that point, they would offer better value for long-term investors.
California-based Doordash started operations in 2013. In less than a decade, its share of the U.S. food-delivery market has grown to an impressive 50%. Next in line are UberEats, owned byUber Technologies (NYSE:UBER), with 23% and Grubhub (NYSE:GRUB) with 18%.
According to recent research led by Derek Tittle of Ohio University, â€œWhen consumers order restaurant food delivery through a mobile phone application like Uber Eats or DoorDash, they order from a company that is part of a global phenomenon, Online Food Delivery (OFD). Globally, this market is expected to exceed $85 billion in revenue by 2024.â€
Similarly, Janna Stephens and her colleagues at Ohio State University highlight, â€œDigital ordering represents half of all food delivery visits, expanding beyond traditional dinner delivery to encompass breakfast and lunch delivery.â€
The â€œstay-at-home, work-from-homeâ€ trend of 2020 has contributed to the growth of the industry, and restaurant-delivery apps have become among the most popular apps on smartphones.
In its Form S-1 filed with the Securities and Exchange Commission (SEC) in November, Doordash said, â€œIn 2019 and during the nine months ended September 30, 2020, we generated revenue of $885 million and $1.9 billion, respectivelyâ€¦ [W]e had a net loss of $667 million and $149 million, respectively.â€
Close to 400,000 merchants use Doordashâ€™s platform. About 90% of its business is in the U.S., followed by orders in Canada, Australia, and the U.K. The company expects â€œfurther international expansion to build on the massive market opportunity that is already available to us.â€
Doordash Stock Is Expensive
Despite the growth of the sector, Doordash stock is richly valued. First of all, the company is still unprofitable. In fact, management highlights that issue as a risk factor for investors, saying, â€œWe have a limited operating history in an evolving industryâ€¦ We have a history of net losses, we anticipate increasing expenses in the future, and we may not be able to maintain or increase profitability in the futureâ€¦ We may not continue to grow on pace with historical rates.â€
Other major food-delivery apps have also had trouble achieving consistent profitability. For instance, Uber Eats CEO Dara Khosrowshahi has recently said that the company is hoping to become profitable in 2021. Similarly, GrubHubÂ reported a Q3 loss on Oct. 28.
Meanwhile, the industry is competitive with little customer loyalty. Put another way, none of these major apps necessarily has a clear competitive edge on the others. And the sector is also consolidating. For instance, GrubHub is about to merge with the Europe-based delivery company Just Eat Takeaway.comÂ (OTCMKTS:TKAYY). Similarly, Uber is about to complete the purchase of privately-held Postmates.Â
As Americans get hopeful about a return to â€œnormalâ€ life thanks to vaccines, investors wonder whether these companies can continue their rapid growth. If that is not the case, DoorDash stock could easily come under further pressure.
Currently, the stockâ€™s price-sales ratio stands at 16.46. By comparison, the P/S ratios of Uber and Grubhub are 7.14 and 4.1, respectively.
The Bottom Line
Doordash stock currently has a market capitalizationÂ of about $45 billion. Well-established restaurant chains do not necessarily have such high market capitalizations. For instance, Dominoâ€™s Pizza (NYSE:DPZ), whose share price climbed 30% in 2020, has a market capitalization of about $15 billion.Â
Thus, the current premium of Doordash stock is difficult to justify. Since I find the shares expensive at these levels, I would wait for them to drop further before buying them.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
TezcanÂ Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation and publishes educationalÂ contentÂ on investing.
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