Is DoorDash a Sustainable Growth Stock?

Food delivery platform DoorDash (NYSE:DASH) has grown in popularity this past year, thanks in part to the pandemic. In the first quarter of 2021, the company’s total orders increased by a stunning 219% year over year while its revenue skyrocketed 198% to $1.08 billion over the same period. Meanwhile, its stock price is up 50% from its IPO last December.

But after an initial spike in share price, DoorDash stock has gone nowhere since hitting 52-week highs back in February. Clearly, Wall Street seems to think the 2021 business success isn’t enough to warrant a larger valuation of the stock. What gives? 

Dasher completing a food delivery.

Image source: Getty Images.

How DoorDash makes money 

DoorDash makes money primarily through three channels. First, it takes a commission of 10% to 25% on all restaurant sales made through the platform, with much of this cost being passed on to the consumer. There isn’t anything wrong here, as DoorDash saves restaurant owners the cost of hiring their own delivery drivers and building their own delivery fleets.

Second, it charges customers $10 per month for the subscription service DashPass, which allows them to bypass delivery fees for orders above $12 as well as reduce service fees. The low-level users of the service help balance out the cost of the high-level users. 

Third, DoorDash cuts costs by classifying essential delivery personnel as gig workers (independent contractors) rather than as employees. This saves DoorDash a great deal of money by enabling it to avoid observing minimum wage regulations and paying health benefits, work-related expenses, severance, and so on. Unfortunately, its questionable treatment of its workers has increasingly put DoorDash in the spotlight.

Employment has become a controversy 

The use of independent contractors means many of the costs of doing business fall on the worker, rather than on the employer. For instance, let’s say Sarah orders a meal from a local restaurant via DoorDash. DoorDash posts the delivery request in its app and Dasher John signs up for the delivery. En route to the restaurant, John gets a flat tire and needs to change to a spare. DoorDash generally pays a flat fee for each delivery. So, in this case, John likely spent significant time changing the tire, likely delivered the food on a delayed basis to Sarah’s residence, and probably got paid as little as $4.50 for his efforts (because Sarah was angry at the delay and didn’t tip). 

That $4.50 is not enough to cover the cost of getting a new tire, the time lost that could have been spent on other deliveries, and with the rising cost of gas, it may not have even covered the fuel costs (or self-employment taxes, health care expenses, etc.). John essentially worked to deliver food at a loss (for the betterment of Sarah and DoorDash).

The business model works only a little better in countries like Canada and Australia where universal healthcare coverage helps lower worker costs a bit. But most American workers don’t have that alternative. Since Dashers are not classified as employees, DoorDash is not liable for their health insurance. The worker’s liability situation gets that much worse if the Dasher gets into a work-related car accident and requires hospital treatment. 

Congress has begun efforts to at least begin to address these issues. On March 9, the House of Representatives passed the Pro Act, which would grant gig workers the right to unionize. The bill still needs to pass the Senate ( a long shot) and be signed by President Joe Biden to become law. Unionization isn’t a direct answer to the workers’ problems, but it has great potential to affect both the workers and the companies involved in the gig economy.

Back in Q1, DoorDash’s gross margins and net margins stood at 48% and negative 10%, respectively. While revenue skyrocketed, the company’s net loss situation did not improve substantially. Investors could see the company’s margins shrink further if workers gain more power to affect their work situation and it could go far toward blowing up DoorDash’s who business model. Other food delivery companies face the same risk, but DoorDash has the most to lose because it currently controls a whopping 57% share in the industry. 

Can you count on DoorDash stock?  

Given all these uncertainties, DoorDash is not a good stock to hold for the long term. Too much of its business model relies on “aggressively cutting” labor costs. That doesn’t really paint a good public image — and has often attracted the attention of lawmakers seeking to make changes.

What’s more, investors should expect a cooldown in growth as restaurants across the continent open up for in-person dining. Overall, DoorDash stock looks too expensive at 14 times price-to-sales (P/S). Instead, check out consumer goods stocks that are affordable and don’t have long-term risks looming over them. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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View more information: https://www.fool.com/investing/2021/07/15/is-doordash-a-sustainable-growth-stock/

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