Before the pandemic hit last year, experts criticized the DoorDash (NYSE:DASH) business model, saying it wasn’t viable. However, the food delivery service is an absolute necessity post-2020. The virus crisis put the service in high demand, and it’s not only food. Delivery trucks swarm my neighborhood daily. The highest profile ones are from Amazon (NASDAQ:AMZN), FedEx (NYSE:FDX) or UPS (NYSE:UPS). Also among them are lower-key delivery people, too. Since demand is this strong, DASH stock can have a viable bullish thesis.
Source: Sundry Photography / Shutterstock.com
Food delivery is part of the gig economy and that’s here to stay. This is not a fad and will thrive long after the Covid-19 worries subside. Most restaurants now have checkout stations specific for food delivery runners. In my area I see four of them, of which DASH is one. I bet that the scope of these services will expand even further.
DASH Stock Next Move Is Up to Management
DoorDash hasn’t been public on Wall Street long enough for me to scrutinize it yet. Also since it has already shed a lot of its highs I can take a calculated risk. It is unfortunate that the stock has a high ticket price so early in its public life. It makes the risk seem bigger. Luckily we can use options to mitigate the risk. There we can risk less out-of-pocket now for potentially bigger percent returns later.
The drawback with options is the management of time. Investors can flip that equation on its end by selling, not buying them. Instead of buying DASH stock outright or call options, I could sell the March $140 put and collect almost $6 per contract. Since I receive a credit I don’t even need a rally to win. The stock can then fall more than 20% before I start losing.
This is it not a viable strategy for those who do not want to own shares. But it is definitely a viable method to get bullish on a stock and leave room for error. Buying calls also reduces the out-of-pocket expense compared to buying shares. However unlike selling puts, when buying calls, time is the enemy and I need a rally to win.
DoorDash Is Doing Well So Far
This company is still young so it hasn’t earned the benefit of investor doubt yet. The fundamental metrics don’t do it justice because it needs time to mature. We have already established that they are growing fast and they are doing it at a more profitable rate. Since 2019, revenues and gross profit grew 7 and 9 times respectively.
Critics point out losses but that is normal for companies that grow this fast. The operational execution for this type of business is always challenging. Luckily the market demands it so eventually companies like DoorDash can develop pricing power. It may take a while before they become profitable and I should not insist on it yet. Imagine if Amazon skimped on spending a few years ago. We would not have had the birth of the cloud as we know it.
I know I can’t convince all the skeptics because DASH stock seems frothy. But investing is not easy nor is it a slam dunk guarantee. This is to say that there is risk and without it there would be no reward. I consider this a speculative stock so I shouldn’t bet the whole farm on it.
Other concerns I have include competition and the overly exuberant stock markets. Indices make new highs hours ago. That alone adds extrinsic risks from a potential correction. Also competition is fierce and getting hotter. For example, Uber (NYSE:UBER) bought the alcohol delivery company Drizly thereby upping the ante for everyone.
Charts Can Help
Source: Charts by TradingView
The modern era of investing must include the use of charts. This is the age of computer trading as they now control 80% of the volume. This sounds bad but it’s not because they are relatively predictable. They use math to make decisions so we can too. By looking at a few hints on the charts we can avoid making the obvious pitfalls.
Even if my intention is to hold the stock a long time, my goal is to eliminate the easy mistakes. Current DASH stock price action is easy to read, that it is buy-able into $170 per share. Even if it fails there I see stronger support $12 lower.
By simply looking at the chart you can see current price is near the center of the action. It traded its first half below and then above current levels almost in a mirror image. The exception to this is that one candle late January. That action came part of the shenanigans stemming from the GameStop (NYSE:GME). This gives me reason to expect that this descent will stabilize and revert soon. It’s in managements’ hands now.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.