Expanding Globally And Innovating Across Verticals Fuels Revenue And Margin Growth

Key Takeaways

• DoorDash's strategy to reduce fees and enhance efficiency aims to boost consumer retention and increase order frequency, influencing revenue positively.
  
• The company's international expansion and focus on markets with high retention rates, alongside broadening its merchant base and improving ad sales, could significantly expand revenue and margins.
  
• DoorDash faces challenges in maintaining growth due to softening demand, market saturation, and the high costs of expansion into new verticals and international markets.

Catalysts

Operates a commerce platform that connects merchants, consumers, and independent contractors in the United States and internationally.

• DoorDash's focus on improving consumer affordability by reducing fees and optimizing efficiency suggests a potential increase in consumer retention and order frequency, positively impacting revenue growth.
  
• The company's international expansion and improvement in unit economics, especially in markets where they have better retention than in the U.S., could drive revenue and margin expansion in those regions.
  
• Continuous investment in expanding selection, both in restaurants and new verticals like grocery, and the onboarding of tens of thousands of new merchants could enhance platform attractiveness and stimulate higher gross order value (GOV).
  
• Enhancements in the ad tech stack and advertising product offerings, especially with the fast growth of the CPG advertisement segment, could increase revenue through higher ad sales.
  
• Operational efficiency improvements, such as reducing order defect rates and reducing merchant churn while maintaining a focus on investments in engineering and product innovation, could lead to better gross margins and EBITDA growth over time.

Assumptions

• Analysts are assuming DoorDash's revenue will grow by 15.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.2% today to 10.3% in 3 years time.
• Analysts expect earnings to reach $1.5 billion (and earnings per share of $3.42) by about September 2027, up from $-407.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.2 billion in earnings, and the most bearish expecting $645 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 53.7x on those 2027 earnings, up from -124.9x today. This future PE is greater than the current PE for the US Hospitality industry at 19.5x.
• Analysts expect the number of shares outstanding to grow by 4.64% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.97%, as per the Simply Wall St company report.

Risks

• Softening restaurant demand suggests potential challenges in maintaining high growth rates, impacting revenue.
  
• Risks associated with new customer acquisition in an environment where it might be perceived that market saturation has been reached post-pandemic, potentially limiting top-line growth.
  
• The emphasis on expanding the number of use cases and acquiring new customers across various categories could lead to increased marketing and operational costs, adversely affecting net margins.
  
• International expansion and the pursuit of retaining higher retention rates in these markets introduce operational and execution risks, which could affect both revenue and earnings if not managed properly.
  
• Efforts to enhance product offerings and expand into new verticals necessitate significant investments, posing risks to operating performance if these initiatives do not yield expected returns.
  

Valuation

• The analysts have a consensus price target of $143.44 for DoorDash based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $170.0, and the most bearish reporting a price target of just $119.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $14.9 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 53.7x, assuming you use a discount rate of 7.0%.
• Given the current share price of $123.56, the analyst's price target of $143.44 is 13.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.