DoorDash: Undervalued Even After A Massive Rally (NYSE:DASH)

Investment thesis

DoorDash (NYSE:DASH) stock was one of the hottest during the pandemic stock market frenzy, but now the share price is more than three times lower than the all-time high of late 2021. My valuation analysis suggests that the stock is still attractively valued even after a massive year-to-date rebound. The company is apparently navigating a harsh macro environment, but the revenue growth momentum is still strong, and I believe that the company has a lot of room for profitability improvement. I like the management’s commitment to internal processes enhancement which, at the end of the day will lead to margins expansion. Considering all the factors, I think DASH is a “Buy”.

Company information

DoorDash is a leading food delivery marketplace connecting customers with restaurants enabling them to order meals for either delivery or takeaway. According to the latest 10-K report, the primary offerings include the DoorDash Marketplace, which operates in four countries, including the U.S., the Wolt Marketplace operating in 23 countries, and Platform Services.

The company’s fiscal year ends on December 31. In the fiscal year 2022, the domestic market represented about 95% of the company’s sales.

Financials

DoorDash went public in late 2020. Therefore, we have only the past five fiscal years for long-term financial analysis. Revenue growth over this period has been immense and increased more than twenty-fold between FY 2018 and FY 2022. I like that the company significantly expanded its profitability metrics as the business scaled up. On the other hand, in the past two fiscal years, we can see that the trend of the gross and operating margins was unstable. The company has already achieved positive levered free cash flow [FCF], but if we deduct the stock-based compensation [SBC], the metric is still dancing a little below zero.

For sure, the pandemic-related quarantine measures helped a lot to fuel the company’s skyrocketing revenue growth. But the momentum is still very strong, according to the recent quarterly performance. Revenue YoY growth has been consistently above the stellar 30% level over the past six quarters. But I also have to underline that expenses are also growing rapidly and are outpacing the topline growth, which adds downward pressure on margins.

I like that the company reinvests a significant portion of sales to R&D. Conversely, SG&A expenses are much higher and represent more than 40% of the company’s sales. I understand that the company is young and needs to spend on SG&A to improve brand awareness and customer loyalty. Still, the SG&A to revenue ratio decline could have been faster, especially given the immense revenue growth. I think the company’s high SG&A to revenue ratio means substantial room for improvement in the operating and FCF margins.

The company is navigating a challenging environment, but in the upcoming quarter, revenue growth is expected to be very strong with an about 27% YoY increase and a significant normalized EPS expansion from $0.09 to $0.29. The high inflationary environment has been demanding for the company, but I think these headwinds were temporary and not secular. Moreover, I am convinced that, as a young company, DASH has a lot of room for improvement in its internal processes. I like that during the latest earnings call, the management underlined its commitment to profitability improvement with a disciplined approach to efficiency and capital allocation.

Indeed, the company has been very conservative in capital allocation and is facing a harsh environment with a fortress balance sheet. The company is substantially above $3 billion net cash and has a meager debt-to-equity ratio. Short-term liquidity is also in good shape, meaning the company is ready to weather the storm even if it lasts several more quarters.

Valuation

The stock delivered a massive 65% year-to-date rally, significantly outpacing the broader market. Multiples are hot, so DASH has a deficient “D-” valuation grade from Seeking Alpha Quant. For me, it is not entirely correct to make conclusions about growth companies’ valuation based purely on multiples. Profitability metrics of relatively young companies like DASH are volatile, so most of the popular valuation ratios might not give a fair view.

Therefore, I would like to simulate multiple scenarios of a discount cash flow [DCF] valuation approach. Given the company’s early stages of business and volatile profitability, I think a relatively high 10% WACC would be fair. I have revenue consensus estimates for the next decade, projecting a 9.7% revenue CAGR for DASH. For the FCF margin, it is tricky because we saw above that this metric has been very volatile in the last few years. From the TTM perspective, the levered FCF margin ex-SBC is close to zero currently. I use this as my expectation for the current fiscal year. For the years beyond, I expect that the FCF margin will expand by two percentage points yearly, peaking at 14% in FY 2030. These are the assumptions for my base case scenario.

As you can see, the DCF model suggests that the stock is about 11% undervalued with rather conservative underlying assumptions. Also, remember that the company is in a solid above $3 billion net cash position, making the valuation even more attractive. Also, I would like to simulate one more scenario because revenue consensus estimates for FY2030-2032 look too pessimistic with no revenue growth. Let me apply at least a 5% revenue growth for the years beyond FY 2030 for my optimistic scenario. Other assumptions I will leave unchanged.

Under a slightly more optimistic revenue growth profile, the stock is about 20% undervalued. My valuation analysis suggests the stock is attractively valued at current levels.

Risks to consider

As a growth company, DASH is expected to deliver stellar revenue growth. If DASH fails to maintain the projected growth trajectory, it will likely lead to investors’ disappointment and a stock selloff. The company’s historical financial performance suggests that it has a solid track record of success, but it does not guarantee future growth.

Another substantial risk is fierce competition. The company faces solid competition from such established players like Uber and Grubhub in the domestic U.S. market. DoorDash competes with strong players to retain customers and merchants, and deliverers.

Last but not least, the stock market has rallied massively since the beginning of 2023, and the wave of cooling down is not impossible. According to the CNN Fear & Greed Index, the stock market is mainly driven by extreme greed. I think that dollar averaging would be a good solution for long-term investors to mitigate this risk.

Bottom line

To conclude, DoorDash stock is an attractive investment opportunity. Growth prospects look bright even under the challenging environment, and the potential to improve profitability is substantial. I like the management’s commitment to innovation and very prudent approach to capital allocation. My valuation analysis, that the stock is very attractively valued at the current stock price levels. Therefore, I assign the stock a “Buy” rating.