Why DoorDash Stock Is At Least 11% Undervalued

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What makes stocks go up and down? A company’s stock goes up if it beats and raises — namely it grows faster than analysts expect each quarter and boosts its growth forecast — otherwise its share price falls.

What can a company do to beat and raise? It can compete in a market that’s accelerating and keep winning a bigger share of that market. To win more market share, the company must offer customers more value for the money than rivals do.

One more thing companies must do is to keep investing in new growth opportunities because their core markets will eventually mature. If you want more on this, read my book Disciplined Growth Strategies.

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

Last December I argued that its stock — which then traded 37% below its peak — could rise because it offered customers more value for the money than rivals — due to its service excellence.

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Sadly, DoorDash stock kept falling — and now trades down 42% from where it ended December 2021. How so? I did not anticipate how much demand would drop in 2022 as pandemic restrictions released people from home confinement and let them go out to restaurants.

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

But DoorDash just shed its coils by proving that 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 selection
  • DoorDash is newly tapping a 700 million person European market thanks to a recent acquisition
  • DoorDash is gaining market share due to its excellent service

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

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

Boffo Second Quarter Results And Guidance

In its June-ending quarter, DoorDash’s revenue, total orders, adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), and 2022 order value and adjusted EBITDA guidance all exceeded analyst expectations.

Here are the details:

  • Q2 revenue rose 30% to $1.6 billion $80 million more than analysts polled by FactSet expected, according to the Wall Street Journal.
  • Q2 total orders grew 23% to 426 million — seven million more than Wall Street’s forecast, noted the Journal
  • Q2 adjusted EBITDA of $103 million was $47.9 more than analyst expectations, according to Bloomberg
  • 2022 order value forecast increased from a range — the midpoint of which was $50 billion — to $52.5 billion ($170 million more than Wall Street’s forecast), reported Bloomberg.
  • 2022 adjusted EBITDA forecast increased 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, wrote the Journal.

Rising Restaurant Prices, Broader Product Selection

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

DoorDash noted that a contributor to revenue growth was that consumers kept ordering food and household essentials despite restaurant and store reopenings. And despite “a softer consumer spending environment” restaurants have raised menu prices on deliveries — helping to boost DoorDash’s revenue, noted the Journal.

What’s more, by asking customers what else besides food they wanted the company to deliver, DoorDash boosted its revenue per order and lowered its delivery cost per order by 9%.

As the Journal wrote, “DoorDash expanded its options during the health crisis to include grocery chains and convenience stores, pinging consumers as they paid for food to ask them if they also wanted household items from a nearby store. That has helped raise consumer spending and lower delivery costs because drivers can carry multiple orders together.”

Geographic Expansion

In June, DoorDash completed its 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 was also growing 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 digits [130% in the third quarter]. It’s done so while also growing its bottom line.”

Wolt has the potential to contribute much more to DoorDash’s growth. In the second quarter, Wolt accounted for 12 million of DoorDash’s total orders, noted CNBC. That represents a mere 3% of its orders — suggesting far more to come from Wolt in the future.

High Market Share, Great Service

DoorDash is the leader in the large U.S. food delivery market which totaled $31.4 billion in 2021 and is expected to grow at a 7.3% average annual rate by 2025, according to Statista.

DoorDash has twice the market share than its leading competitor. According to Bloomberg Second Measure (BSM), in November 2021, DoorDash’s U.S. food delivery market share was 57% — while second place Uber Eats’s market share totaled 27% (24% from UberEats and 3% from Postmates which it acquired in November 2020).

By May 2022, DoorDash’s U.S. food delivery market share had increased to 59%, according to BSM.

How does DoorDash keep gaining market share? In my view, the company is a textbook case of outstanding service leadership. Its culture shapes its operations in a way that makes merchants more profitable, consumers more satisfied, and delivery people better off than do competing platforms.

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

Be customer-obsessed, not competitor-focused.

DoorDash makes short term sacrifices to preserve its reputation for customer excellence. In its third month of operation, DoorDash experienced an outage. Xu saw this as an opportunity to demonstrate how much he cared about customer satisfaction — so the company gave refunds to each consumer — costing “a double digit percentage of its bank account.”

Get 1% better every day.

DoorDash maintains daily pressure to improve in measurable ways — such as reducing delivery times, increasing efficiency, or improving personalization.

Keep in direct contact with the customer.

Xu and other DoorDash executives take a day a month to “do a delivery or engage in customer support, menu creation, or merchant support.” DoorDash believes this contributes to its “category-leading spend retention and capital efficiency.”

Dream big, start small.

As I wrote in Scaling Your Startup, before taking on new capital, companies should perfect the execution of a new service so it becomes more efficient with scale. DoorDash follows this approach — it “begins projects in one market, with a lean team, and with very little capital and asks them to earn their way toward increasing investment,” according to its prospectus.

Although the mean target price for DoorDash is $100, I think the stock could go higher than that. Morningstar MORN Senior Equity Analyst Ali Mogharabi estimates its fair value at $159.

He is more bullish on 2022 than on 2023. Mogharabi raised his 2022 projections due to “DoorDash’s strong second quarter and the expected contribution from Wolt during the second half.” However, he expects tougher comparisons and possibly increased competition in 2023, so he lowered his growth projections for next year.

Its rapid growth in the face of strong market headwinds tells me that DoorDash will deliver profits for investors who buy its shares now.

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