Summary
- DoorDash serves a need, but high costs are difficult to mount unless the company shifts towards a model that requires less dependence on manual labor (which is expensive and inefficient).
- Expanding into groceries and international markets will not solve the company’s cash bleeding because neither plan shifts away from using manual labor. These expansions will only expand losses.
- Investors need to adjust EBITDA and FCF for DoorDash’s excessive stock-based compensation. The result reveals destruction of capital and losses being subsidized by the shareholders.
- The risk/reward in buying DoorDash is completely unfavorable. There are so many more rational opportunities in the market.
Business Overview
DoorDash (NYSE:DASH) is a meal delivery service company which offers to serve the needs of three primary groups: merchants, consumers, and workers (“Dashers” as the company calls them). The company has over 32 million users and over 15 million memberships of its subscription services: DashPass and Wolt+. On the merchant end, DoorDash has several services that enable businesses to fulfill demand via DoorDash’s platform. On the consumer end, revenue is generated via service and delivery charges.
Value Proposition
DoorDash’s value proposition is undeniable as there is a huge market for meal delivery services. The problem lies in making that type of business profitable, but we will get into that shortly. Here is a brief overview of how DoorDash provides value to its primary constituents:
- For merchants: provides a platform to advertise and facilitate convenience for customers (which is a huge factor in getting sales)
- For consumers: provides a platform for conveniently getting food without the need to pick it up or wait in line
- For Dashers: provides a flexible way to earn money
So Many Bulls
Much of the bull case for DoorDash is centered around its expansion into grocery delivery and international markets. Many analysts point to the increased revenue derived from these expansions as a point of strength and catalyst for the stock price. This popular methodology of “valuing” companies based on sales is typical in a low interest rate environment where investors happily put off the bottom line if it will be higher in the future.
This methodology, flawed as it is even when rates are low, becomes even more problematic when rates rise. The further cash flows are pushed into the future, the less they are worth today when rates are increasing. DoorDash’s sales are irrelevant without some prospect of bottom-line profitability. Simply focusing on top line growth in a higher rate environment, (but also, any environment) is an insufficient bull thesis for share appreciation.
Note: One interesting side note is that the same phenomena occurs in bond ownership – the longer the duration, the more sensitive its value is to a change in interest rates.
The Financials
The company’s gross margins are solid. It makes sense because DoorDash is providing neither the ingredients for the food nor the transportation for the worker. As the company grows, I would not be surprised if gross margins improve due to better efficiency.
The operating margins are not quite as good and currently hover in the mid-teens and will be more difficult to turn positive due to the structural nature of changes needed to be made in order to achieve this goal.
Also, while not included to prevent cluttering this article with huge tables, the company’s current and historical balance sheets have been healthy. As of Q1 2023, the company has sufficient cash and no debt.
DoorDash’s Business Model is Flawed
The fundamental problem with DoorDash’s business model is that labor is too expensive to produce a profit at the prices DoorDash charges consumers. DoorDash will ultimately have to raise its prices in order to produce a profit, but because it competes for customers with Uber Eats, GrubHub, Postmates, etc, without any noticeable service differentiation, raising prices is difficult. All four companies are in a bidding war to see who can shoot themselves in the foot the most before the other three bleed out.
Possible Solutions for DoorDash’s Business Model
Taking a fundamentally unprofitable business model and expanding it into other areas does not solve the root problem. DoorDash’s best bet is to earn enough advertising money from merchants and subscription revenue from consumers on the platform, which would add high margin revenue on top of fees from actual deliveries. Delivery fee-based income needs to be a supplementary source of revenue, not a main driver.
The cost associated with providing this marketing/subscription-based service is smaller as the infrastructure required is mostly via network capabilities and maintenance/upkeep. The fee-based revenue model has extremely high costs as it requires manual labor and that is inefficient to scale. This is why simply adding more revenue by expanding into grocery delivery or international markets will not make a difference to the bottom line.
Insider Sales
There has not been a single director, officer, president, or other high-ranking executive which has made a purchase of shares in the open market in the last two years. In fact, there have only been sales by the aforementioned group. Including the excessive stock-based compensation, the shareholders are getting the short end of the stick… from both sides. Much more on this later.
Q1 2023 Results
DoorDash’s recent earnings report did not change the investment thesis to be more positive. At best, it reinforced more of the same difficulties.
Income Statement
Starting with the income statement, we can see no sequential improvement in operating losses on a proportional basis. In other words, even though revenue is up 40%, costs also went up by exactly 40%. This is a clear example of my earlier point that it is difficult to scale up businesses which rely primarily on manual labor and that expanding into other markets with the same flawed model is only going to expand your losses. I will leave an example at the end of this section.
Next, at the bottom, the weighted-average number of shares is listed and shows an 11% dilution year over year. This is another clear example of my earlier point regarding the excessive stock-based compensation which is diluting the pool of existing shareholders. There are no earnings to share in and even if there were, the investors who bought in early are ultimately going to get a smaller slice of the pie, despite deferring their future consumption.
Example: Imagine you have a business hiring workers to fill up holes. Let’s say each worker works eight hours and charges $10/hr. Next, assume the land owner pays you a market rate of $50 per hole. Every hole your employee fills costs you $30 ($50 – $10 x 8hrs). If you expand to other plots of land, you are still losing $30 per hole. As a result, your losses have grown in proportion with your expansion. The only way you reverse this is by making your workers more productive (i.e giving them a bigger shovel so it takes less time) or replacing them with a cheaper machine. DoorDash has this same problem, except you can’t make a driver deliver a meal any faster than the restaurant can make it or the speed limit imposes. In this case, the worker cannot be more productive and you cannot replace him with a machine. Taking this same flawed business model into additional markets is only going to dig DoorDash into a deeper hole… pun intended.
Free Cash Flow
The company’s calculation of free cash flow is misleading as the CFFO includes stock-based compensation.
When calculating free cash flow, investors have to subtract capital expenditures and stock-based compensation. Stock-based compensation is a real-world cash expense, not a non-cash expense, which is how it is technically (and inaccurately) classified. If a salary is not paid today in cash, then it is paid tomorrow in stock. Regardless of which method chosen, each shareholder’s proportionate ownership is reduced as the former reduces the company’s present value while the latter is a claim against future earnings that results in dilution. Funny enough, one of the analysts on the earnings call actually complimented DoorDash’s free cash flow growth. Even he is ignoring this accounting trick.
For example, in 2022:
CFFO was $1.8 billion, CAPX was $1.2 billion, and SBC was $889 million. Therefore, FCF was negative at ($295) million, contrary to what the company reports, which is that FCF was positive at $604 million.
For Q1 2023:
The FCF calculation is ($428 million – $230 stock-based compensation) = $198 million. Even though this quarter’s FCF was positive, it remains to be seen if that holds throughout the year as additional shares vest. It is simply too early to determine if Q1 FCF will remain positive sequentially. Lastly, I want investors to put DoorDash’s executive compensation into perspective:
Here you have a company on pace to lose almost $700 million in 2023 paying executives $230 million on $2 billion of revenue. In other words, shareholders absorb a $700 million loss, while the executives take home over 11% of revenue as pay. Management’s stock-based compensation should be dramatically reduced until the company becomes profitable. This current arrangement is not in the interest of any public shareholder.
Note: Not all of SBC leads to dilution.
Adjusted EBITDA
DoorDash made several comments on the strength of their Adjusted EBITDA (which is a meaningless, accounting based “profitability” measure) and the sequential improvement quarter over quarter. However, this is misleading because, yet again, the primary driver is stock-based compensation. The earnings are not positive nor are they even close to being positive. Removing SBC every single quarter has produced negative earnings.
Note: EBITDA in general is meaningless because it neglects capital expenditures and does not capture changes in working capital.
Overall Impression
DoorDash’s Q1 2023 report did not showcase additional strength; rather, it highlighted all the weaknesses in the business. Good businesses do not mask poor results using fancy accounting tricks.
Takeaway
As it stands, the company’s fundamental business model hinders its profitability. Even if you disagree and are bullish on its prospects, the losses incurred over the past few years have been substantial, management’s pay is too high, operating cash flow has been negative, and there has been no improvement to the bottom line.
So, the question remains: why buy this stock? At this point in time, the timing of future profitability (if achieved) is uncertain. Why not wait to see if things move in the right direction?
Paying $60 per share for a stock that has:
- No profit and no near-term solution to obtain it
- An unscalable business model (as it stands today) due to manual labor dependency and constraints
- Reduced value of future cash flows due to rising rates
- Increasing costs, especially wages due to double digit inflation
- Egregious stock-based compensation
- Endless insider selling
- No insider buying
- No differentiating factor from competitors
- High regulatory risk (reclassifying independent contractors as employees)
- Immoral past behavior by management, such as stealing employee tips
- For additional risks, please click here
There are so many other opportunities in the market which make more sense and have a better balance of risk and reward. Even die hard DoorDash enthusiasts should take a wait and see approach, at the very least.