[I own DoorDash stocks and I may change my opinion anytime. This is not investment advice and please do your own due diligence.]

DoorDash announced its 2024 Q3 financial results a few days ago. Total orders, GOV and revenue grew by 18%, 19%, and 25% on a year-on-year basis, respectively. The company’s top line growth was so strong that its reported GOV number was above almost all sell-side estimates (source: Refinitiv; all sell-side estimates in this article come from Refinitiv).

GAAP Profitability and More

I first wrote about DoorDash’s GAAP profitability in 2022 (link) and I put, “The current consensus is that DoorDash will not turn GAAP profitable until 2026. I feel moderately strongly that there is a good chance that DoorDash can turn GAAP profitable meaningfully earlier than 2026.” This August, I wrote on this topic again (link), predicting that “DoorDash reaching GAAP profitability feels ‘imminent’ to me — highly likely, I feel, it could realize within the next few quarters, if not in this upcoming quarter.” Indeed, DoorDash announced it has successfully achieved GAAP profitability in 2024 Q3 with a GAAP net income of $162M.

According to my proprietary financial modeling, in this most recent quarter, it is possible that DoorDash has achieved another profitability breakeven milestone: For all of DoorDash’s business lines outside of “U.S. Restaurant” — such as grocery, convenience, retail, international, ads, Commerce Platform — as a whole, they probably have reached “contribution profit” breakeven already.

If that is the case, allow me then to speculate the reason why DoorDash did not make a corresponding announcement. Due to DoorDash’s pace of reinvesting, which is intense and also unpredictable (for example, forced to respond to competitors’ moves), those business segments’ bottom lines can well dip back into the negative again. And no company management team would like to announce good news in one quarter and have to walk back and reverse that good news later. That, I think, is why DoorDash didn’t announce this exciting update this quarter. Instead, we got a couple of comments on the grocery part of the puzzle and I quote CFO Ravi Inukonda, who said on the earnings call, “when I look at that [grocery deliveries] in the P&L, that doesn’t concern me.” On the same call, CEO Tony Xu also said, “we don’t actually need large baskets to make the math work for grocery.” Together, the CEO and the CFO made it abundantly clear to investors that DoorDash’s grocery delivery business is doing totally fine from the profitability perspective. And, considering that it is highly likely that grocery delivery is one of the most difficult business lines to turn profitable, these management comments represent, undoubtedly, a positive sign of the underlying profitability trends of all of DoorDash’s business lines outside of “U.S. Restaurant.”

Valuation Risk

DoorDash’s success story has been increasingly better understood by an ever growing group of investors, with more and more investors bidding up DoorDash’s stock price. And this set of dynamics directly results in DoorDash’s now heightened valuation. At this stage, no sensible observer would consider DoorDash’s stock “cheap” anymore.

Back in 2021, many investors were still loaded up on “expensive” stocks, only to suffer heavy drawdowns in 2022. In investing, it is about making money, not about mindlessly buying into great businesses. Investors should not confuse the two. Regardless of how great the underlying business is, investors can lose a lot of money if they overpay for a stock. And that is why I think at this point, when it comes to DoorDash, investors should pay a lot of attention to “valuation risk.”

To help us understand where DoorDash’s valuation level is, I built the following table, comparing the valuation multiples between DoorDash and a collection of benchmark stocks and comparable businesses:

As shown in the table above, DoorDash is trading at a valuation premium above many other businesses. As such, I think, it is prudent to assume that DoorDash’s stock would not receive any more uplift in its valuation multiples going forward. And therefore, for DoorDash’s stock, its future rate of return is likely to converge to, and eventually be pegged to, the organic growth rate of the earning power of the underlying business.

Or, put differently: DoorDash’s stock may still be able to deliver strong stock price performance in the coming years as long as the following two conditions are met:

1. The company continues to beat the Street’s expectations on both top line and bottom line, for every single quarter going forward. This point is critical for the purpose of maintaining DoorDash’s stock valuation multiples at its current level.
2. The company continues to improve its underlying profitability so that the company’s longer term earnings power continues to improve at a fast clip. As long as the first point holds, this second point will help determine the future rate of return of DoorDash’s stock price.

The gradual penetration of last-mile delivery services and the physical nature of a last-mile delivery network, these two combined together, provide the headroom for continued top line growth and continued bottom line efficiency improvement. Both scale (i.e., increasing consumer penetration) and profitability (i.e., increasing logistics efficiency), I think, are high probability events. However, neither are guaranteed. Truly, in investing, no risk no return!

Let’s take a look at what the downside could be. At DoorDash’s 2024 Q1 earnings call, the company gave an earnings guidance that was weaker than what the Street was then thinking about. Following the 2024 Q1 earnings call, the sell-side estimate of DoorDash’s 2024 EBITDA was then adjusted downward by 1.3% (yes, just 1.3%). During those four months from March to July, DoorDash’s stock price dropped by more than 30%! 1.3% and 30%. That is the level of “sensitivity” we are dealing with when investing in a not-cheap stock!

If DoorDash can continue to deliver on the above mentioned two points, the company can have a real chance of delivering a stock price return of more than 20% a year for the coming few years. That is my current estimate. If not, we are likely to see DoorDash’s stock price experience, sporadically, something similar to summer 2024 — deep and prolonged drawdowns.

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Disclaimer: Jackson Zhu (the “Author”), individually or through one or more entities controlled by him, holds long positions in the securities of and derivatives associated with DOORDASH, INC. (the “Company”) described herein and stands to benefit from an increase in the price of the common stock of the Company. Following the publication of this post, the Author intends to continue transacting in the Company’s securities, and may become long, short, or neutral on the Company’s securities. As such, the Author may change his view on the analysis presented as of any date following the date of initial publication. Likewise, the discussion contained here is not designed to be applicable to the specific circumstances of any particular reader, and you should consult with your own advisers to determine if any investment ideas discussed here are appropriate for your circumstances. The Author has obtained all information herein from sources believed to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind, whether express or implied. The Author makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice, and the Author will not undertake to update this publication or any information contained herein. Please read our full disclaimer at “jacksonzhu.com/about/.”