DoorDash, Inc. (DASH)

02/29/2024
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Price Target: $148 (21% upside)

Current Price: $122

Target Date: Q1 2025

Rating: Overweight

After our Uber position hit our latest price target almost immediately, we decided to check in with the rest of the delivery industry to see if other players were operating with the same efficiencies. It turns out that companies in the algorithm business within the delivery industry have established some astonishing growth both in terms of revenue and margins over the past year.

In particular, the team at DoorDash Inc ($DASH) has hit an inflection point where users are growing at a great clip and the value each individual user provides is accelerating every quarter. After Uber Eats dominated the pandemic era, it appears DoorDash has developed an operation lean enough to truly compete in this space. 

It seems that focus is a key factor in establishing efficiency in this business. Uber doubled down on refining their core ridesharing algorithm, and the results have been a complete turnaround in their ability to drive a profit. We're confident this is a focus issue because Uber Eats has lagged behind the core Uber product.

Meanwhile, DoorDash has now established enough of a foothold that will help them generate outsized revenue and margin growth as their network improves. When you look under the hood at DoorDash's user mix and revenue base, you begin to understand a much different philosophy and growth path compared to how Uber conquered the rideshare world. This focus is a critical pillar of our investing thesis that we'll expand on later in this article.

DoorDash has focused on building a robust network and meticulously turning casual customers into power users over time. Their order values and profit-per-order are compounding every quarter, and the company is on the verge of achieving actual profitability. DoorDash can easily achieve positive cash flow inside 2024, which will significantly boost the stock while the rest of the market regresses to the median.

So, let's delve into all the factors that are positioning DoorDash as a significant contender in the gig delivery business. Turns out, there's a lot to love here.



DoorDash Overview:

And let's just cover the basics immediately. If we're going to approach this with honesty and consider investing in DoorDash now, especially after the stock has surged by 127% in the past year, we need solid reasons to believe that the company isn't overvalued.

To be clear, we stayed out of the delivery space longer because we thought names like Uber were drafting off of Meta's success by bragging about 'AI' improvements that wouldn't stick around.

Instead, it just turns out that the tech industry has experienced a complete sea change in how efficiently algorithms route individual drivers to customers within a wider network. Uber proved their efficiency was real across 3 quarters of solid growth, and now we're confident that DoorDash has done the same.

We're just lucky that DoorDash hasn't hit profitability as quickly as The Street was hoping so we still have a little time to lock in an entry point. 

This entire report lives and dies based on the strength of DoorDash's Q4 earnings report from earlier in February. Keeping it brief, DoorDash achieved several critical milestones to cap off a strong 2023.

Let's briefly list those: 

  • DoorDash has proven they can accelerate growth with a 27% YoY boost in their Gross Order Value (GOV), hitting $66 billion for the full year of 2024. More importantly, DoorDash is generating better and better revenue growth from the orders flooding their network. Q4's revenue also climbed 27% to $2.3 billion.

  • All of this growth is happening while user growth regresses to the mean at DoorDash. DoorDash achieved 37 million Monthly Active Users (MAUs) in Q4. That's up 16% from last year. In contrast, DoorDash grew MAUs by 28% in 2022. Some investors looked at that number and decided it was time to bail on DoorDash's growth narrative. However, this demonstrates that DoorDash is simply attracting more valuable users and therefore driving stronger margins. 

  • DoorDash cut their net loss by 75% in the last year -- hitting just $156 million in Q4. That figure is compounded by the fact that DoorDash's net loss as a percentage of their GOV fell nearly 80% to -0.9%. 

If that last bullet point looks really convoluted, don't worry, it is. But hidden in all these numbers is the story of how DoorDash has massively improved their efficiency as a platform. Honestly, this almost feels like a management issue. If DoorDash could establish a way to demonstrate their growing margins that didn't require us to bust out our TI-84, the stock would probably be easily a few points higher than now. 

So, let's capitalize on the weak storytelling and present these numbers in a way that's far more compelling.

DoorDash's Accelerating Efficiency: 

Let's start with that ludicrous 'Net Loss as a % of GOV' figure.

This time last year, for every $100 spent on DoorDash's platform, DoorDash lost about four-and-a-half bucks. Even though DoorDash boosted network order value to $66 billion in 2023, DoorDash only lost about 90 cents for every $100 spent on the platform. If DoorDash hadn't established a more efficient platform, we'd see that percentage decrease at a much slower clip. 

More importantly, the only real reason that DoorDash isn't currently at our price target is because investors were hoping to see profitability by now. The stock is being critically undervalued despite the fact that DoorDash has built a foundation that can easily push them over the hump into cashflow positivity as early as Q2. 

But there's one more piece to this puzzle that helps us understand how and why DoorDash's efficiency is accelerating. And this piece also explains how DoorDash's operational philosophy is completely different from Uber's. 

DoorDash is a Power User Factory: 

At the core of DoorDash's growth in 2023 is what kind of users the company is adding.

DoorDash's Monthly Active Users grew at a slower clip to 37 million. But each and every one of those users bought more stuff on the platform and contributed a lot more average value than they did last year. DoorDash has focused on building a reliable delivery network that operates really well.

Meanwhile, Uber has relied simply on winning at scale. While Uber's rideshare product has improved drastically, they haven't established the same level of reliability and functionality that DoorDash has. 

If DoorDash works for you, it works really well. So much so that you're more likely to use DoorDash as your entire operating system for food. Users will log more pickup orders via DoorDash if they're frequent users of the platform for the sake of convenience and time savings. 

This compounds further with the most important metric of all: DoorDash's DashPass subscribers grew 20% to 18 million in 2023. Sure, the rate of growth is also declining there, but still very high for that scale. 

But the most important part of this whole thesis is DoorDash's ratio of MAU's to DashPass Subscribers. 49% of DoorDash's MAUs are DashPass members. For comparison, Uber subscribers make up about 13% of Uber's active user base.

That's not a fair comparison because we aren't comparing Uber Eats alone to DoorDash -- but it helps us make our point. 

This is the one ratio at DoorDash growing at a healthy clip. DashPass Subscribers made up 40% of MAUs in 2021 and 47% in 2022. This means that DoorDash isn't wasting mountains of cash trying to grab a huge volume of consumers, they've refined their marketing apparatus to only attract the highest-value consumers possible.

They're saving a ton of spend by growing more efficiently, and because of that their entire network has become more valuable as each individual user boosts their spend on the platform and each individual order becomes more and more profitable. 

This power user focus is brilliant because it cuts a lot of bloat out of the platform outright and saves a lot of costs. It's even better because as the network gets more efficient, DashPass orders will still be more profitable as DoorDash doesn't need delivery fees to be cashflow positive.

This accelerating base is key to ensuring DoorDash will continue accelerating its growth while making its final push toward profitability. And that efficiency is what's going to drive DoorDash toward our price target. 


DoorDash Outlook:

The only real blemish on DoorDash's outlook came from their net loss in Q4. It actually expanded a little compared to Q3.

That could just be due to Q4 being such a high-volume period that DoorDash's network experienced a little more stress than expected. If you remember our extensive Amazon strategy from last week, you'll know that a true bull signal comes when margins stay high despite stressful loads on a network. 

However, DoorDash still is achieving scale and therefore some fluctuations in their operational efficiency are to be expected.

DoorDash is guiding toward improved EBITDA in Q1 and the full year of 2024 -- and we're eager for the moment when the company becomes cash flow positive. 

DoorDash is an efficient operation that's only compounding that efficiency as time goes on. We're really excited to see where they take things from here.

Price Target: $148 (21% upside)

Current Price: $122

Target Date: Q1 2025

Stock: DoorDash Inc ($DASH)

Rating: Overweight

Risk/Reward: Medium-High / High