DoorDash (DASH -2.01%) has been one of the surprising stories coming out of pandemic-induced lockdowns. Of course, sales and the number of customers surged during lockdowns, when restaurants were closed to in-person diners. But sales have remained elevated even as restaurants have reopened.
However, despite sustained customer orders, DoorDash is still losing money on the bottom line. That has been crucially punishing to its stock price, as the market has shunned unprofitable growth stocks. The stock is down 72% off its highs reached in late 2021. However, management thinks the selling is overdone and said the company would be buying back its stock.
Let's consider if investors should follow suit and buy DoorDash stock.
Image source: Getty Images.
Revenue has exploded for DoorDash
Indeed, DoorDash has experienced remarkable revenue growth over the past several years. From 2018 to 2021, revenue exploded from $291 million to $4.9 billion. Revenue more than tripled for two straight years before growing by 69% in 2021. The screaming popularity of its food delivery business is due to the fantastic convenience it adds to people's lives.
DASH Revenue (Annual) data by YCharts
Consider a stay-at-home mom with young children. A trip to the grocery store could be a mission: getting the kids in and out of car seats, folding and unfolding a stroller, and then trying to retrieve the items on the shopping list. Paying DoorDash a few dollars to do your shopping and deliver it to your doorstep is a relief. Certainly, you can think of more cases that benefit from the service.
The challenge for DoorDash is to offer this service at a price high enough to stem losses on the bottom line. In its most recent quarter, which ended on March 31, DoorDash lost $167 million on the bottom line, up from a loss of $110 million during the same quarter last year. This is despite revenue increasing from $1.1 billion to $1.5 billion in that time.
The losses concern investors, who doubt if the company will ever become profitable. It has shown limited economies of scale so far, despite the massive revenue growth. Rapid food delivery is not a business that lends itself well to scale economies. After all, a single Dasher can only make one or two deliveries in an hour. The goal, it seems, is to have so many customers making so many orders that Dashers can pick up several orders collectively and deliver to the same apartment or street all together.
DoorDash stock is not cheap
Regardless, management is confident in its prospects. It said it would be buying back $400 million of its stock. To put that figure into context, DoorDash's market capitalization is $23.8 billion as of this writing. The announcement could send a signal to investors that the stock is undervalued.
DASH Price to Free Cash Flow data by YCharts
Still, trading at a price-to-sales of 4.4 and a price-to-free cash flow ratio of 91.6, DoorDash stock is not cheap. However, for those bullish on DoorDash's prospects, the stock has scarcely been priced lower on these metrics. But investors would be prudent to wait for a further pullback in the share price before buying DoorDash stock.
