DoorDash (NYSE:DASH) reported second-quarter operating results last week which showed continued growth despite economic reopenings. The delivery company that caters to restaurants nearly doubled revenue from the same quarter last year, when it tripled revenue from the year before that.
The performance went a long way in relieving the investor concern of decreasing ordering on DoorDash when restaurants open for in-person dining. It’s one less worry for shareholders, but the battle is not over. DoorDash has a long way to go before it reaches a scale large enough to be profitable on the bottom line.
Consumers like convenience
Gross order value, which is the dollar total of orders placed on its platform, increased by 70% in the second quarter from the same time last year to reach $10.5 billion. DoorDash makes its revenue by charging a fee to restaurants and consumers, usually as a percentage of order value. That percentage (take rate) increased to 11.8%, up from 11% in the previous year.
The combination of the increasing order value and a higher take rate boosted revenue by 83% from Q2 2020. The figure is even more impressive because it comes on top of 213% growth in Q2 2020. Consumers are sending a signal highlighting just how much they appreciate the convenience benefits provided by DoorDash. Even though fees charged to customers can reach over 30% of your order value, the relatively small total sum is seemingly worthwhile.
For instance, a $13 order may cost folks $4 in delivery and service fees (a rate of almost 30.8%). However, folks may view the transaction as paying $4 for the convenience of not needing to get in a car and drive somewhere, look for parking, and wait in line. This desire for convenience could fuel continued demand for DoorDash services in the long run.
Indeed, management said as much in the Q2 earnings announcement press release: “While the current environment remains uncertain, we believe demand for services that make life more convenient will increase nearly perpetually over the long-term.”
What this could mean for investors
The challenge for DoorDash is and will remain fulfilling that customer demand for convenience efficiently — a task it has not yet achieved. In the most recent quarter, revenue increased by $561 million from the previous year. At the same time, operating expenses increased by $687 million. This presents DoorDash management with a difficult problem to resolve.
The biggest part of the increase in expenses was due to a rise in sales and marketing. This increase was on two fronts: First, to incentivize consumers to make orders, and second, to incentivize individuals to join DoorDash as deliverers.
Overall, on the surface, the company’s quarterly results looked fantastic. However, digging into the details, you realized it wasn’t that great. It’s never a good sign when costs rise faster than revenue, especially when business is booming.
To make the investment less risky, investors interested in DoorDash stock should wait a few more quarters to see if the company is making progress toward reducing expenses as a percentage of revenue.
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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