Why DoorDash Shares Are At Least 11% Undervalued?

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What causes stocks to go up and down? A company’s stock rises when it’s right and rises — namely, it grows faster than analysts expect each quarter and raises its growth forecast — otherwise the stock price falls.

What can a company do to beat and raise? It can compete in a market that is accelerating and continue to gain a greater share of that market. To gain more market share, the company must offer customers more value for money than competitors.

Another thing companies need to do is continue to invest in new growth opportunities as their core markets will eventually mature. If you want more about this, read my book Disciplined Growth Strategies.

This comes to mind when considering food delivery service DoorDash, whose stock rose 18% after it reported better-than-expected growth in the second quarter and raised its forecast, according to TUSEN.

Last December, I argued that its stock – then trading 37% below its peak – could rise because it offered customers more bang for the buck than rivals – because of its excellent service.

Unfortunately, DoorDash stock continued to fall – and is now trading 42% lower than where it ended in December 2021. How then? I didn’t expect how much demand would fall in 2022 if pandemic restrictions released people from house arrest and allowed them to go to restaurants.

Simply put, with declining demand for its services, DoorDash could not beat and increase.

But DoorDash just shrugged off its twists by proving it could beat and raise despite those headwinds. And that makes me think the stock is undervalued for three reasons:

  • Restaurants are increasing their prices and DoorDash has broadened its product range
  • DoorDash recently enters a European market of 700 million people thanks to a recent acquisition
  • DoorDash gains market share thanks to excellent service

With a median price target of $100, the stock could rise 11% or more, according to TUSEN.

(I have no financial interest in the securities mentioned in this post).

Boffo results and guidelines second quarter

In the quarter ended June, DoorDash’s sales, total orders, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), 2022 order value and adjusted EBITDA expectations all exceeded analyst expectations.

Here are the details:

  • Q2 turnover rose 30% to $1.6 billion, $80 million more than analysts polled by FactSet had expected, according to the Wall Street Journal.
  • Q2 total orders grew 23% to 426 million — seven million more than Wall Street’s forecast, the Journal noted
  • Q2 Adjusted EBITDA of $103 million was $47.9 more than analysts’ expectations, according to Bloomberg
  • 2022 order value forecast rose from a range — the midpoint of which was $50 billion — to $52.5 billion ($170 million more than Wall Street’s forecast), Bloomberg reported.
  • Adjusted EBITDA Forecast for 2022 rose from a range between $0 and $500 million to between $200 million and $500 million — the midpoint of which exceeds Wall Street’s estimate by $121 million, the Journal wrote.

Rising restaurant prices, wider product selection

DoorDash’s revenue increases are positive surprises because they defy the conventional wisdom that people visit restaurants rather than order from delivery services and are spending less because their income growth is not keeping pace with inflation.

DoorDash noted that a contributor to revenue growth was that consumers continued to order food and household supplies despite the reopening of restaurants and stores. And despite “a softer consumer spending environment,” restaurants have increased menu prices for deliveries — which helped boost DoorDash’s revenue, the Journal noted.

Additionally, by asking customers what else they wanted the company to deliver besides food, DoorDash increased revenue per order and reduced delivery costs per order by 9%.

As the Journal wrote, “DoorDash expanded its options to include supermarket chains and convenience stores during the health crisis, pinging consumers while paying for food to ask if they also wanted household items from a nearby store. That has helped to increase consumer spending and reduce delivery costs, as drivers can carry multiple orders at once.”

Geographical Expansion

In June, DoorDash completed the acquisition of Wolt. As I wrote in December, the deal gives DoorDash access to 22 new countries representing 700 million consumers.

Wolt’s platform enables DoorDash to deliver new product categories, including cosmetics and electronics.

Wolt also grew much faster than DoorDash. As CEO Tony Xu told investors, Wolt “has grown to $2.5 billion and annualized gross order value is growing triple digit [130% in the third quarter]. It’s done while also growing its bottom line.”

Wolt has the potential to contribute much more to the growth of DoorDash. In the second quarter, Wolt accounted for 12 million of DoorDash’s total orders, TUSEN noted. That only represents 3% of his orders – suggesting there’s a lot more to come from Wolt in the future.

High market share, great service

DoorDash is the leader in the major US food delivery market, which totaled $31.4 billion in 2021 and is expected to grow at an average annual rate of 7.3% by 2025, according to Statista.

DoorDash has twice the market share of its closest competitor. According to Bloomberg Second Measure (BSM), DoorDash’s US food delivery market share was 57% in November 2021, while Uber Eats’ second-place market share was 27% (24% of UberEats and 3% of Postmates it sold in November). 2020 acquired).

By May 2022, DoorDash’s US food delivery market share had risen to 59%, according to BSM.

How does DoorDash continue to gain market share? In my opinion, the company is a textbook example of excellent service leadership. Its culture shapes its business in a way that makes merchants more profitable, consumers more satisfied, and deliverers better off than competing platforms.

Here’s how DoorDash’s values ​​make its stakeholders better off:

Be obsessed with the customer, not focused on the competition.

DoorDash makes short-term sacrifices to maintain its reputation for customer excellence. In the third month the company was in business, DoorDash had an outage. Xu saw this as an opportunity to show how much he cared about customer satisfaction – so the company gave refunds to every consumer – which “cost “a double-digit percentage of his bank account”.

Get 1% better every day.

DoorDash maintains daily pressures to improve in measurable ways, such as shortening delivery times, increasing efficiency or improving personalization.

Stay in direct contact with the customer.

Xu and other DoorDash executives take one day a month to “make a delivery or participate in customer support, menu creation, or merchant support.” DoorDash believes this contributes to its “leading expenditure retention and capital efficiency”.

Dream big, start small.

As I wrote Scaling up your startupBefore raising new capital, companies must perfect the execution of a new service so that it becomes more efficient with scale. DoorDash takes this approach — it “starts projects in one market, with a lean team, and very little capital, and asks them to earn their way into more investment,” according to the prospectus.

While the average target price for DoorDash is $100, I think the stock could go higher than that. morning star
TOMORROW
Senior equity analyst Ali Mogharabi estimates the fair value at $159.

He is more optimistic about 2022 than about 2023. Mogharabi raised his forecast for 2022 because of “DoorDash’s strong second quarter and Wolt’s expected contribution during the second half.” However, he expects tougher comparisons and possibly more competition in 2023, so he lowered his growth forecasts for next year.

Its rapid growth in the face of strong market headwinds tells me that DoorDash will bring gains to investors who buy its stock now.

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