DoorDash's Potential Undervaluation Post Recent Surge

Business Services company DoorDash is standing out today, surging to $110.96 and marking a 3.1% change. In comparison the S&P 500 moved only 1.0%. DASH is -18.35% below its average analyst target price of $135.89, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, DoorDash shares have outperformed the S&P 500 by 16.7%, with a price change of 43.0%.

DoorDash, Inc., together with its subsidiaries, operates a commerce platform that connects merchants, consumers, and independent contractors in the United States and internationally. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.

DoorDash does not release its trailing 12 month P/E ratio since its earnings per share of $-1.07 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for DASH of -103.7. Based on the company's positive earnings guidance of $1.28, the stock has a forward P/E ratio of 86.7.

As of the second quarter of 2024, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 22.06, and the S&P 500 has an average of 27.65. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

DASH’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.

When we perform the calculation for DoorDash, we obtain a PEG ratio of 19.22, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.

DoorDash's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023 1,673,000 123,000 1,550,000 711.52
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: $288.83 Million
  • Average free cash flown growth rate: 39.7 %
  • Coefficient of variability (lower numbers indicating more stability): 0.0 %

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 Consumer Discretionary sector, which stands at 3.18 as of the second quarter of 2024.

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 mixed growth prospects because of its weak operating margins with a positive growth rate, and a PEG ratio of less than 1.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.