DoorDash (DASH -0.72%) stock was a pandemic darling thanks to the company's dominant food delivery platform, which kept restaurants afloat and consumers fed during periods of social restrictions. Its business has understandably slowed since then, and its stock price has fallen 65% from its all-time high.
Now, DoorDash is looking for new ways to spark growth. CEO Tony Xu released a letter to investors alongside the company's financial results for the second quarter of 2023 (ended June 30), in which he discussed a vision of several new businesses under the DoorDash banner.
The company's food delivery business has achieved scale and it's the largest in America, yet it's still losing money. Any investments in other projects will likely amplify those losses for years to come, but Xu says expanding DoorDash's horizons could be highly beneficial over the long term. Here's what the strategy could mean for the stock.
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DoorDash delivered a stable second quarter
At the height of the pandemic during 2020 and 2021, DoorDash was routinely growing its quarterly revenue by triple-digit percentages as demand soared for food delivery. That coincided with the company's record-high stock price. But once social conditions returned to normal, DoorDash's revenue growth suffered a sharp deceleration -- but it certainly hasn't stalled.
In Q2, the company's gross order value (GOV), which is the total value of all goods customers purchased on the DoorDash platform, came in at $16.4 billion. That figure was above the high end of the company's guidance, which is a good sign demand remains strong. Revenue came in at $2.1 billion, and while that was a solid 33% increase year over year, it marked a slowdown from the 40% growth rate it achieved in Q1.
But the biggest challenge for DoorDash has always been at the bottom line. It was even losing money while business was booming during the height of the pandemic, despite its lightning-fast revenue growth. In Q2, the company made a net loss of $170 million, which was an improvement year over year, but it did tick higher compared to Q1.
To put it plainly, food delivery is a highly competitive industry with very low barriers to entry; platforms like DoorDash, Uber Technologies' UberEats, and GrubHub effectively offer the same service, so the only way they can compete is on price.
That creates a race to the bottom, which squeezes profit margins, and it means DoorDash can't reduce its marketing spending because it would risk losing its dominant U.S. market share of 65%. In fact, DoorDash spent $967 million on marketing in the first six months of 2023 alone. That was an increase of almost 16% compared to the same period last year, and it's by far the company's largest operating expense.
Investing in new businesses could delay profitability even further
DoorDash is no longer thinking about restaurants and food delivery alone, but rather retail as a whole. The company successfully expanded into grocery delivery with the help of Wolt, a European last-mile delivery company it acquired a year ago. And in March this year, it added to its retail presence with high-profile brands like Victoria's Secret joining the platform.
In June, DoorDash marked its 10-year anniversary with the largest update to its consumer-facing application since it was founded. Users will now see separate tabs for food, groceries, and retail, along with the ability to build separate shopping carts for each. Ultimately, DoorDash wants to become the "everything" platform when it comes to commerce and delivery.
In his Q2 investor letter, Xu explained that while he was happy with the company's restaurant marketplace, he wants several more businesses just like it. He outlined a theoretical example of the value proposition that five similar business units could deliver, even if they need to generate negative free cash flow for the first five years in order to scale. While it makes sense on paper, it's clear that profitability would have to take a back seat for years to come.
Xu acknowledged that some investors might be concerned DoorDash intends to spend money forever on building new verticals, and he said he hopes the company is lucky enough to be in that position, although it probably won't be the case. But he stressed the importance of DoorDash's significant investments in areas like grocery, retail, and expanding the company's footprint internationally for its future success. For one thing, it will help differentiate it from competing platforms.
But investors have yet to reap the rewards
Xu wants to use DoorDash's success in the food delivery business as a blueprint to scale the aforementioned verticals like retail. But is that strategy a recipe for success? The company estimates it invested $1 billion in its restaurant marketplace in the first six years before it generated a consistent contribution profit (similar to gross profit, which is before operating costs are taken out).
But DoorDash has now been in business for a decade and that success still hasn't flowed to the bottom line -- so will investors endure another 10 years waiting for the company to scale a series of similar segments? Meanwhile its main rival, Uber, just delivered its first ever profitable quarter.
As I mentioned at the top, DoorDash stock is down 65% from its all-time high. But it's also down 17% from its initial public offering (IPO) price of $102 from 2020, so even early investors are currently underwater.
If DoorDash continues to improve its bottom line while maintaining its current pace of revenue growth, its stock has a real chance to recover. However, if its net losses start to blow out again because it's leaning into its new verticals with billions of dollars in capital investment, investors might send its stock down even further.
