DoorDash has a bright future despite setbacks: Analyst

Shares of DoorDash (DASH) slide in Friday's pre-market after posting its fourth-quarter results on Thursday, beating Wall Street's revenue expectations, but warning shareholders on having to absorb some of the regulatory costs that have been added to many delivery businesses for the first quarter of 2024.

Fox Advisors Founder and CEO Steven Fox joins Yahoo Finance to discuss the company's performance, message to its shareholders, and its operations outlook.

Talking about expansion, Fox comments: "They also bring to the market, especially with the acquisition they did with Wolt... better expertise in terms of managing the logistics and the micrologistics of restaurant delivery. On top of that, we wouldn't discount any of the new verticals that they're going into, especially since they are looking to do that internationally as well. So things like groceries, convenience stores, they're making very good progress in those areas, but they do require investment. We think the core profitability is probably being hit, call it 400 basis points versus the 4-5% type of incremental margins from they're getting from just investments. They are going to invest heavily, and they have a proven track record..."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

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DoorDash shares driven lower despite solid fourth quarter results. Total orders and marketplace gross order value topping Wall Street estimates. But the company facing regulatory costs amid steep competition in the food delivery arena. Here to discuss this and more with us is Fox advisors founder and CEO Steven Fox. And Steven, thanks so much for being with us this morning. I'm curious your thoughts about what's going on with Dash here because the stock is down this morning.

I wonder if you see this as a buying opportunity or is this a shorting opportunity, if you believe that this stock is going to continue to tumble.

STEVEN FOX: So it's probably somewhere in between, we fully recognize that greed is good on Wall Street. But let's put it in perspective. The stock has done tremendously well. Since the end of '22, it's up about 150% or more. It's done well year to date, it's up 28%. Basically what happened is the company is setting guidance that it believes it can do. Taking out of that beat and raise expectation from the street, which in the context of the growth isn't that bad but it leads to some adjustment in the stock price near term.

- And Steve, I want to ask you because when you have this revenue beat but obviously still not getting rewarded here. But as we hone in on this gross order values expected to reach between 74 billion and 78 billion. That's up from a year earlier $66 billion in 2023. Do you think the stock is being unfairly punished on this? Some of this about the softer consumer as well.

STEVEN FOX: So the sensitivity around that is, well, one, first let's recognize this is a massive number and the company has built a huge business in the US and now studying abroad too. But the growth is going to slow a little bit in their expectations. So from the high teens in GOV down to maybe exiting the year at a low teens type of growth rate.

Still very attractive growth for these levels with optionality down the road for re-acceleration as they get bigger in things beyond restaurants as they've been working on.

- So talk to me about the area in which you see the most expansion for Dash moving forward. I know that in your note you talk about international. I'm curious if you think that that's going to be the biggest potential movement for them in terms of where they can get more profit moving forward.

STEVEN FOX: Yeah. So they're very under-penetrated internationally. They also bring to the market. Especially with the acquisition they did of wolt, they bring to market I think better expertise in terms of managing the logistics and the micro logistics of restaurant delivery. On top of that, we wouldn't discount any of the new verticals that they're going into, especially since they're looking to do that internationally as well.

So things like groceries, convenience stores, they're making very good progress in those areas, but they do require investment. We think the core profitability is probably being hit. Call it 400 basis points versus the 4% to 5% type of incremental margins they're getting from just investments. So they are going to invest heavily in these areas and they have a proven track record of managing these well and turning them profitable.

So Steven, how well positioned are they against Uber and Instacart as well. So I think they're all a little bit different animals when you break it down. I think Instacart by far is the leader in groceries. I think in fact, people are overestimating DoorDash and Uber's penetration in the US against Instacart for groceries. And remember, Instacart is basically US only for their business.

DoorDash is expanding internationally now. Uber does very well internationally in delivery. I think DoorDash is proving that they can compete and even gain share against Uber in different markets. You have to look at it where Uber does well maybe in urban areas versus DoorDash does better in the suburbs, et cetera. But they're definitely going to hold their own, it's a very well run company.

But I think there's going to be differences you're going to have to consider going forward. I mean, in the grand scheme of things, we've been very much more bullish on Uber the last year and a half, two years, and now we're looking at Instacart saying, this is an undervalued asset.

- Well, another similarity between Uber and DoorDash is the announcement of this buyback program, Steven, I'm curious if you think that Dash's buyback program was a little bit of a shiny object saying, hey, look over here, don't look at our bad earnings print versus Uber's which may have been a little bit more about solid cash flow. What's your take on that? No. I think both companies are really hitting a sweet spot in cash flow generation and growth in cash flow.

So I think while DoorDash's number might be smaller than Uber's as of market cap, et cetera, it reflects that they're growing free cash flows. And in fact, they probably could buy back more stock than what they're saying right now. They're talking about $1 billion. We see opportunity for the cash supposed to be even better depending on how they invest in the future. I think the biggest difference between DoorDash and Uber is you get a better sense in the numbers for how Uber is investing and growing in new categories, new geographies.

Whereas DoorDash keeps all of that information closer to the vest. Really important context there, Steven. Thank you so much for joining us. That was Steven Fox.