[I own DoorDash stock.  This is not investment advice.  Please do your own due diligence.]

In the second half of 2021, DoorDash’s stock price more than doubled.  In a short span of a few days in November 2021, DoorDash’ stock price surged by more than 30% to over $250 a share.  Clearly, DoorDash’s company fundamentals had not improved by 30% in those past few days.  Recognizing that stock prices reflected more of investors’ emotions and less of business fundamentals, I sold all my DoorDash stock in early November 2021. 

Coming into 2022, DoorDash’s share price has dropped by over 65%.  Over the past few days, it has come down by 20%.  DoorDash’s actual business did not come down by 20% over the past few days.  Realizing that stock prices reflect more of investors’ emotions and less of business fundamentals, I kept buying DoorDash stocks in recent days.

I am going to explain what I think has happened in the stock market and why I remain bullish about DoorDash. 

Resilient Demand

Many investors and traders hold some preconceived ideas about DoorDash.  Those ideas are highly convincing that people tend to agree right away without thinking twice.  I am going to list two of these ideas here and I will argue that those ideas do not square with facts. 

Preconceived notion #1: Food delivery is the ultimate “consumer discretionary.”  In a recessionary and/or inflationary environment, demand for this kind of not-really-needed service will collapse.

Highly convincing.  But there are plenty of examples that show the other way. 

Think of Argentina and Turkey.  These two countries are experiencing hyperinflation, with local consumer prices increasing at a pace of some 80% YoY.  Both countries’ GDP (in USD) have been in decline for the past several years.  Perfect examples of recessionary and inflationary environments.  Yet, consumers in both countries are still using food delivery apps and inflation’s impact on food delivery is “very light” (source: Delivery Hero’s 2022 Q1 earnings call). 

Also, think of Brazil.  The country’s GDP (in USD) has been in decline for the past decade.  Yet, its local food delivery business has been doing just fine.  iFood owns the majority of Brazil’s food delivery market.  iFood did 478M orders in 2020, 702M orders in 2021, and 386M orders in 2022 H1 alone. 

Think also of China.  China’s economic growth rate has been trending downward for the past decade.  At the moment, it is also experiencing a heightened level of unemployment.  Meituan dominates China’s food delivery space and Meituan is still seeing a 8% to 15% YoY growth rate in its delivery business (source: Meituan’s quarterly financials).

Preconceived notion #2: Consumers can “self-create price deflation” by cooking for themselves or doing pickups.  So, in an inflationary environment, demand for food delivery will collapse. 

Highly convincing.  But it just might not be true. 

First, if this argument is true, food delivery would not have existed in the first place, regardless of whether we are in a 2% inflation world or a 8% inflation world. 

Second, the above mentioned examples of Argentina and Turkey argue against this “self-created price deflation” idea. 

Third, if this “self-created price deflation” idea is true, then many of today’s largest businesses would not have existed in the first place.  Take Starbucks as an example: a cup of instant coffee made at home costs around 5 cents to 6 cents, while a cup of Starbucks coffee easily costs $4 to $5.  That is a price difference of 100x.  Yet, despite today’s high inflation, Starbucks reported that “not currently seeing any measurable reduction in consumer spending or any evidence of customers trading down” (source:  Starbucks’ 2022 Q3 earnings call, hosted on Aug 2, 2022).  Think about it.  If consumers are paying 20% to 50% more by ordering food delivery versus doing pickups, the same consumers are paying 100x more by buying Starbucks coffee — plus, having to make an extra trip to a Starbucks store.  Think about it. 

Chipotle is another example. Its business continues to perform and its customers are not leaving for cheaper restaurants nor simply cooking at home. Chipotle actually confirmed that food delivery (i.e., customers order food delivery from Chipotle) has been “pretty stable throughout” (source: Chipotle’s 2022 Q2 earnings call). Where is this “self-created price deflation” story here?

These bearish views on food delivery and DoorDash invoke fear and negative emotions.  They are “emotional hot potatoes” that investors pass around.  You feel the heat and you want to pass them onto others.  So, they spread very quickly.  But, as I argued above with real examples, those bearish views just might not be true at all. 

If you are still not convinced, then just hear what DoorDash’s CEO Tony Xu had to say.  A few days ago, on Sep 20, 2022, Tony told CNBC that “Consumer demand has been very resilient… The order rates from all of the cohorts — whether they joined during the pandemic, before the pandemic, out of the pandemic — are all relatively similar.” 

Inflation Is Good For DoorDash

As I wrote in my prior blog piece (see here), I continue to believe that DoorDash benefits from inflation in many ways:  

• Higher GMV:  Inflation increases DoorDash’s GMV by increasing restaurant menu prices.  
• More delivery drivers:  Inflation creates instances where consumers’ living expenses exceed their job incomes.  The result is a stronger demand for “side hustles.”  For most Americans, DoorDash is a much more attractive side hustle than Uber ridesharing (generally speaking, most people feel less safe driving strangers in their private cars) and InstaCart (a small segment of people enjoys picking and packing activities; few enjoy moving heavy water and milk boxes).  Tony said at the same CNBC interview that DoorDash is seeing “very very strong demand from Dashers all across the country… from all industries.”  More delivery drivers means better network liquidity, leading to a better consumer experience, more consumer orders, and higher driver pay per active hour, which then leads to lower delivery cost per order, which brings us to the next point.  [Note: lower delivery cost per order can co-exist with higher driver pay per active hour — those two ideas are congruent with each other, as long as the delivery network has high order density.]
• Lower cost:  Not only does delivery cost per order come down, but most cost line items rise slower than inflation.  For example, employee salaries are not real-time indexed to inflation; office rents are not either. 

Higher topline.  Lower cost basis.  That is why I think inflation is not bad, and may even be good for DoorDash. 

DoorDash’s Stock Valuation Is Depressed

DoorDash has no debt but sits on a cash pile of ~$4.5B.  DoorDash’s market cap is ~$20B, so excluding cash, DoorDash’s “net” market cap is ~$15.5B.  At a GMV of ~$52B (guidance for 2022), DoorDash is currently valued at a market cap-to-GMV multiple of 0.30x.  

Let’s take a look at some peer companies: 

• iFood in Brazil:  In Aug 2022, Prosus paid €1.5B in cash (plus a contingent consideration of up to €300M) to acquire the remaining 33.3% stake in iFood from Just Eat Takeaway;  post the transaction, Prosus will fully own iFood.  iFood is annualizing a GMV of ~€7.2B (2021 H1, +23% YoY growth).  So, iFood was valued at a market cap-to-GMV multiple of 0.63x (€1.5B x 3 / €7.2B).
  • DoorDash is valued at less than half of iFood.
• Delivery Hero:  It operates in over 50 countries.  Its current market cap is ~€9.4B and it guides to a 2022 GMV of ~€46B.  It has an active history of borrowing and is currently sitting on ~€2.9B of cash and ~€5.2B of borrowings — that is a net debt of ~€2.3B.  So, Delivery Hero is valued at a market cap-to-GMV multiple of 0.25x ([€9.4B + €2.3B] / €46B).
  • DoorDash is slightly more expensive than Delivery Hero.
  • But, Delivery Hero is not profitable, does not generate cash flow, and relies on borrowing. 
• Gopuff:  This is an interesting example.  Gopuff is a private company, so we do not have good transparency into its numbers.  It reported on its official website that in 2021, Gopuff drivers earned in aggregate over $220M, including tips (source link).  For the same year, DoorDash drivers made over $11B, including tips (source: DoorDash’s 2021 Q4 Investor Letter).   Using driver earnings as a proxy to the scale of the businesses, DoorDash was roughly 50x bigger than Gopuff in 2021.  Gopuff is reported to be growing ~45% YoY (source link) and DoorDash is growing ~24% YoY, so that would mean as of now, DoorDash is roughly 43x bigger than Gopuff.  Gopuff’s latest valuation is $15B (as of Jul 2021).  DoorDash’s current net market cap, as I illustrated above, is ~$15.5B.  Following this logic, either DoorDash’s stock price has to go up instantly by 43x fold, or those private investors backing Gopuff have to mark down their Gopuff stocks to a fraction of 1/43 (i.e., cut Gopuff’s valuation to ~$350M).
  • DoorDash is already profitable and generates cash.  For Gopuff, in its current form, it might never be profitable. 

Key risk:  Labor regulations against the use of gig workers.

Just like a year ago, DoorDash stock price is not making sense.  It reflects more of investors’ emotions than company fundamentals.  Recognizing this dynamic, I remain bullish about DoorDash. 

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