DoorDash Looks Overvalued Despite High Revenue Growth

Written by Marc Guberti for The Motley Fool->

DoorDash saw solid revenue growth, while net income fell slightly because of a one-time expense.

Rising competition and soaring inflation are major risks for the company's business model.

Investors should assess where DoorDash and the food delivery industry may head in the future.

High revenue growth doesn't guarantee that a company presents a good buying opportunity for long-term investors, and DoorDash (NASDAQ: DASH) fits that description. The growth stock has slumped by more than 30% year to date despite gaining market share faster than the typical S&P 500 company.

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DoorDash delivered 33% year-over-year revenue growth in the first quarter, which outpaced the S&P 500's 11.4% revenue growth rate for Q1. The company also cited record membership sign-ups and new highs for monthly active users.

Net income dropped by 5% year over year, but that was mostly due to a one-time $48 million restructuring charge. Without this one-off expense, DoorDash would have been profitable.

While Q1 results look good, they mask long-term headwinds that the company faces. One of the biggest ones is rising inflation. The Consumer Price Index inflation rate jumped to 4.2% when it was reported this month. If inflation continues to increase, people will look for ways to reduce their spending, and DoorDash will be one of the first targets.

The average DoorDash food delivery is 25% more expensive than if you had bought food at the store yourself, and some orders have almost 100% markup due to high commission fees and tips for drivers. . It's not the type of business model that can perform well over a long period of time amid hot inflation.

Any weakness in the growth narrative can send DoorDash into a deeper correction, since its valuation offers no room for error. While Uber Technologies (NYSE: UBER) trades at a more reasonable forward price-to-earnings (P/E) ratio of 21, DoorDash trades at a forward P/E ratio of 52.

Uber Eats has been a major catalyst for Uber and looks poised to take some of DoorDash's market share. As more competitors emerge, DoorDash will have to cut back on markups to avoid losing customers. That scenario can put more pressure on profit margins and put a bigger emphasis on the current valuation.

The S&P 500's P/E ratio is approaching 32, which is historically high. Enthusiasm around artificial intelligence is a major factor for the S&P 500's high P/E ratio, with Nvidia delivering 85% year-over-year revenue growth in its fiscal Q1 2027 while expanding profit margins. Nvidia is the largest holding of the S&P 500, which makes it important for this comparison. DoorDash doesn't have those numbers, and even then, it has a much higher P/E ratio than the S&P 500.

Comparing the valuation of DoorDash against companies in its industry (like Uber), and against businesses that are powering the S&P 500 to all-time highs, makes it hard to justify the food delivery app's stock at current levels.

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Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends DoorDash, Nvidia, and Uber Technologies. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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