Will DoorDash ever make money?

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The main goal of a business is to generate profits, right?

Many startups have seemingly forgotten this principle over the past 15 years, especially during the pandemic-fueled market bubble of 2021. Door Dash (DASH 1.41%)A food delivery service which has exploded in popularity in recent years. Even as the company handles tens of billions of dollars in customer orders each year, operating losses continue to pile up and in fact they just got worse in recent quarters. Undeterred by these losses, the executive team said in its latest quarterly letter that the delivery platform it is building will create shareholder value (that is, generate profits) over the long term.

Should investors believe that DoorDash’s management is building a viable business for the future? Or is food delivery just an unsustainable business model?

Steady growth, despite the headwinds of the pandemic

Some key performance metrics for DoorDash looked strong in its recent quarterly report. Total orders grew 27% year over year to $512 million, while gross order volume grew 29% to $15.9 billion. This has led to revenue growth of a solid 40% year over year to $2 billion. In the long run, this growth looks even more impressive. In the first quarter of 2020, just before the pandemic boosted demand for online marketplaces, DoorDash’s revenue was just $362 million.

That means its revenue has grown more than 5.5x in just three years. Many investors were concerned that demand for food delivery platforms like DoorDash would decline once the pandemic lockdowns end and people start dining in restaurants again. So far, this risk has not materialised. Even with the pandemic behind us, DoorDash is gaining 40% year over year top line growth.

DoorDash is looking to maintain this growth by continuing to invest in its restaurant segment and expanding into adjacent commercial categories. The main ones are groceries, alcohol and convenience stores. These categories overlap with food delivery (for example, someone might get beers with their Friday night meal) and could provide another tailwind of growth that further increases the value of the DoorDash market for its customers.

The problem: When will the company stop losing money?

If you were just looking at volume and revenue growth, DoorDash would seem like an easy buy, especially with the stock down 62% since going public. Time to blind buy the dip, right?

Well, there’s a little more to this story. While revenue growth has been solid, DoorDash has yet to deliver positive operating profits over a 12-month period. The company has large variable costs on every order — accounting for 50% of revenue in the first quarter — and spends 25% of its revenue on sales and marketing to attract and retain its customer base. Add in research and development costs and general administrative expenses, and DoorDash posted an operating loss of $171 million in the first quarter.

Take a look at the graph below. These losses have only gotten worse since the company went public. To stem these losses, DoorDash will need to cut its sales and marketing expenses, which has the potential to kill its impressive revenue growth. It’s easy to sell a dollar for 90 cents and call yourself a growth company. However, achieving growth while also making a profit is a more difficult task.

DASH operating income (TTM) data from Y charts

The stock is not cheap

With a current market cap of $26 billion, DoorDash is trading at 3.6 times its trailing revenue. This is higher than the average stock in the S&P 500which has a selling price (P/S) ratio of 2.34. Naturally, DoorDash is growing much faster than the average company, which could cause its P/S to plummet.

But again, you shouldn’t take profitability out of the equation. DoorDash has never demonstrated that it can turn a consistent profit, which should not be taken lightly by any potential shareholder. Taking that into account, it is surprising to see DoorDash trading at a premium P/S compared to the average S&P 500.

There is a lot of uncertainty when buying stock in an unprofitable company, and if DoorDash fails to turn its income statement, there are likely to be many more downsides for shareholders in the coming years.