DoorDash Buys Stock: Should Investors Buy Too?

DoorDash (NYSE: DASH) was one of the surprising stories to come out of the pandemic-induced lockdowns. Of course, sales and customer numbers jumped during the shutdowns, when restaurants were closed to in-person dining. But sales remained high even as restaurants reopened.

However, despite sustained customer orders, DoorDash is still losing money on the bottom line. This was extremely detrimental to its stock price as the market shunned unprofitable growth stocks. The stock is down 72% from its late 2021 highs. However, management thinks the selloff is overdone and said the company would buy back its shares.

Let’s see if investors should follow suit and buy DoorDash stock.

Image source: Getty Images.

Revenue exploded for DoorDash

Indeed, DoorDash has seen remarkable revenue growth over the past few years. From 2018 to 2021, revenue skyrocketed from $291 million to $4.9 billion. Revenue more than tripled for two consecutive years before growing 69% in 2021. The glaring popularity of its food delivery business is due to the fantastic convenience it adds to people’s lives.

DASH Earnings Chart (Annual)

DASH Earnings Data (Annual) 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, then trying to grab the items on the shopping list. Paying DoorDash a few bucks to get your groceries delivered 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 high enough price to stem the bottom line losses. In its most recent quarter, which ended March 31, DoorDash lost $167 million in net income, compared to a loss of $110 million in the same quarter last year. This is despite the increase in revenue from $1.1 billion to $1.5 billion during this period.

The losses concern investors, who doubt that the company will ever become profitable. It has shown limited economies of scale so far, despite massive revenue growth. Fast food delivery is not a business that lends itself well to economies of scale. 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 place so many orders that Dashers can pick up multiple orders collectively and deliver to the same apartment or street all together.

DoorDash stock isn’t cheap

Either way, management is confident in its prospects. He announced that he would buy back $400 million of his shares. To put that number into context, DoorDash’s market capitalization is $23.8 billion at the time of this writing. The announcement could send a signal to investors that the stock is undervalued.

Chart of DASH Price to Free Cash Flow

DASH Price to Free Cash Flow Data by YCharts

Still, trading at a price to sales ratio of 4.4 and a price to free cash flow ratio of 91.6, DoorDash stock isn’t cheap. However, for those bullish on DoorDash’s prospects, the stock price has hardly fallen below these metrics. But investors would be cautious to wait for a further pullback in the stock price before buying DoorDash stock.

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Parkev Tatevosian has no position in the stocks mentioned. The Motley Fool holds positions and recommends DoorDash, Inc. The Motley Fool has a Disclosure Policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

James T. Quintero