Doordash: Uncertain Prospects, Poor Risk/Reward (NYSE:DASH)

DoorDash, Inc. (NYSE:DASH) had a rough 2022 and vastly underperformed the S&P 500.

DoorDash certainly wasn’t the only company to have a rough 2022, and some investors may believe this year could be better for the company. Is this a case of new year, new DoorDash? While we believe it’s possible the company can perform better this year, there is too much uncertainty regarding the long-term viability of the business model.

Thesis

DoorDash stock should be avoided because their business is structurally broken. Many of their business segments are challenged and don’t generate enough value to justify a pricing model that makes financial sense for all involved parties. The company is showing moderate revenue growth at the expense of ballooning operating losses. It’s uncertain whether or not DoorDash can ever achieve GAAP profitability without a significant rethink of the business.

A Lack of Value Added

When analyzing a business, a good starting point is to break down what value that business brings to those that reward them with compensation for adding that value. In the case of DoorDash, they create value by increasing the availability of goods to their customers. Let’s take a look at their business segments and why we believe some of them are structurally broken or at risk.

Delivery

Delivery is probably the part of the business that DoorDash is best known for. This segment involves delivering goods to customers and generally involves the good being transported from the supplying business to the customer’s place of residence. This is a useful service, although DoorDash has had difficulty pricing the service at a level where the transaction makes financial sense for all four parties involved.

The transportation of goods is performed by “Dashers,” which act as delivery drivers that DoorDash classifies as independent contractors. Governments around the world appear to want to clamp down on what they view as tech companies taking a generous view of what it means to be an independent contractor. Whether that’s right or wrong is up for debate, but it remains a major threat to DoorDash’s business. For the record, I do believe that DoorDash is correct in their classification of their delivery drivers as the law currently stands, and I don’t have an agenda or bias against the stock for political or philosophical reasons. But it doesn’t matter what myself or any other observer thinks, only those that make and pass legislation. And right now many of those people have an unfavorable view of DoorDash’s business model.

Pickup

The Pickup service allows people to place orders ahead of time and skip lines when picking up those orders. This is useful and should be a high margin part of the business, but the monetization potential is limited and the value generated is minimal.

DoorDash for Work

This segment is related to the placing of large orders and group catering. Another segment that is useful and high margin but with a limited total addressable market (“TAM”).

DashPass

This is DoorDash’s attempt to satisfy the business communities addiction to subscription models. The reason why most subscription models work is because the marginal cost per additional usage is either zero or minimal. If, for example, someone uses Photoshop a 1000 times a month, it doesn’t unduly burden licensor Adobe Inc. (ADBE). If someone frequently uses DashPass, it burdens DoorDash a lot more than if someone uses it infrequently. It’s very difficult to envision a scenario where this makes financial sense for both DoorDash and the consumer. MoviePass and the AAirpass come to mind.

Platform Services

DoorDash offers white-label delivery and fulfillment services. According to DoorDash’s most recent 10-Q, their Storefront business segment:

“enables merchants to create their own branded online ordering experience, providing them with a turnkey solution to offer consumers on-demand access to e-commerce without investing in in-house engineering or fulfillment capabilities.”

While both of these services are nice to have, many businesses already use something like Shopify Inc. (SHOP) or fulfillment by Amazon (AMZN) for storefront and delivery. They could also just deliver the goods themselves or make customers pick them up on-site. There is likely not a compelling reason for the customer to use these Platform Services at a price that is high enough for DoorDash to make a profit, which is the core issue for their entire business as it’s currently constructed.

Bloated Cost Structure

DoorDash creates minimal value, and as a result customers are unwilling to pay a high price for that value. DoorDash has been operating at a loss in order to satisfy their customers while also incentivizing Dashers to make deliveries. The problem is that the compensation that Dashers require to complete the delivery is higher than what the customer is generally willing to pay. This leads to DoorDash effectively subsidizing transactions to spur activity on the platform. The hope is (as it is with all platform companies such as this) that eventually the company will be able to build a monopoly position and that customers will be willing to pay a higher price for the service because they have become accustomed to it. While this has worked for other tech companies such as Airbnb, Inc. (ABNB), the “gig-economy” companies have not had much success. The core reason companies such as Uber Technologies (UBER) and DoorDash struggle is because in most situations they don’t provide enough value to justify the customer paying a price that is high enough to satisfy the independent contractor performing the labor as well as for the company themselves to make money.

In their Q3 earnings, DoorDash reported that revenues grew 33% year-over-year. This revenue growth came at the expense of profitability, as operating losses for the three month period accelerated to $308 million compared to an operating loss of $100 million in the prior year’s third quarter.

These losses are concerning, especially because their business model has regulatory risk and doesn’t seem to have a path to profitability. If DoorDash is unable to realize significant operating leverage their business model is broken. From an investor’s point of view the situation isn’t promising. As an investor it is unlikely that the potential reward can justify the risk at these levels.

Risk/Reward Highly Unfavorable

I wouldn’t touch DoorDash, Inc. stock with a ten foot pole at these levels. Even if the company is able to turn things around, the reward is paltry at best. This is especially true when compared to other opportunities currently available in the market.

We struggle to find a reason to own the stock until they can prove their business model is viable and can achieve GAAP profitability. It’s probably best to avoid DoorDash, Inc. stock until they have proven their business model or the company is trading at such a low level it becomes a private equity target or a profitable liquidation event.