Farm & Heavy Construction Machinery company DoorDash is standing out today, surging to $112.32 and marking a 3.9% change. In comparison the S&P 500 moved only 0.0%. DASH is 5.81% above its average analyst target price of $106.15, which implies future downside for the stock.
Yet the average analyst rates it as buy, a surprinsingly upbeat outlook. Over the last year, DoorDash shares have outperformed the S&P 500 by 61.4%, with a price change of 80.1%.
DoorDash, Inc. operates a logistics platform that connects merchants, consumers, and dashers in the United States and internationally. The company belongs to the industrials sector, which generally includes cyclical companies -- with the exception of conglomerates whose business may span several industries. Cyclical companies experience higher sales during periods of economic expanision, and worsening outlooks during recessions.
DoorDash does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (EPS) values of $-0.14 and $-2.72. We can see that DASH has a forward P/E ratio of -802.3 and a trailing P/E ratio of -41.3.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the industrials sector has an average P/E ratio of 22.19, and the average for the S&P 500 is 15.97.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide DoorDash's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of -1.68. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing DASH's growth potential .
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From DoorDash's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 1,211,000 | 139,000 | 1,072,000 | 461.26 |
| 2022 | 367,000 | 176,000 | 191,000 | -66.07 |
| 2021 | 692,000 | 129,000 | 563,000 | 285.62 |
| 2020 | 252,000 | 106,000 | 146,000 | 126.79 |
| 2019 | -467,000 | 78,000 | -545,000 | -216.86 |
| 2018 | -159,000 | 13,000 | -172,000 |
- Average free cash flow: $209.17 Million
- Average free cash flown growth rate: 31.9 %
- Coefficient of variability (the lower the better): 274.43 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, DASH is in a position to do either -- which can encourage more investors to place their capital in the company.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
DoorDash's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 6, so the company's assets may be overvalued compared to the average P/B ratio of the Industrials sector, which stands at 4.06 as of the first quarter of 2023.
With a negative P/E ratio., a higher than Average P/B Ratio, and generally positive cash flows with an upwards trend, we can conclude that DoorDash is probably overvalued at current prices. The stock presents poor growth indicators because of its weak operating margins with a positive growth rate, and no PEG ratio.
