Shares of food delivery firm DoorDash (DASH) shot more than 8% higher on Friday following the reveal of some excellent second-quarter earnings results. Indeed, DASH stock was one of the few tech stocks in the green in what was another sea of red for tech and the rest of the market. As one of the better value plays (shares still down over 52% from 2021 all-time highs) in the tech scene, count me as unsurprised if DASH stock keeps dashing higher, even without much help from the rest of the market.
With potential industry tailwinds and recession-resilient traits, I’m one of the bulls on DoorDash, even after the latest slate of anxiety-inducing U.S. employment data that sent stocks drastically lower last week.
Things seem to be going from bad to worse for stocks in the past week, with the word “recession” being used again following July’s unemployment data, which showed that the labor market may be in for a bit of a cooldown. For July, 114,000 jobs were added, well shy of the 175,000-185,000 expectation. On the low end, job adds missed the mark by almost 33%.
That’s not just a slight miss; it’s a major one that could have investors rotating their invested dollars, not just from large-caps to mid-caps amid the “Great Rotation” but from risk-on names to some of the more recession-resilient (or boring) names. If the first rate cut from the Federal Reserve doesn’t come this September, so much for that soft landing for the economy.
On the plus side, the fallen, defensive fast-food firms like McDonald’s (MCD) have performed relatively well recently. And as the so-called “value menu” season heats up into the late months of summer, look for food-delivery companies (DoorDash in particular) to also feel some of the sizzle.
The Bull Case for DoorDash as the Economy Begins to Feel Slight Wobbles
Though DoorDash may be considered by some as a discretionary or even “luxury” service, I view ordering on delivery apps as now deeply engrained in consumer psychology. Perhaps it was a year of lockdown that made ordering dinner on DoorDash a hard habit to kick. Even with prices and fees rising considerably in recent years, consumers still seem willing to pay for the convenience of having meals, drinks, and just about anything delivered in a matter of minutes.
Food delivery may be viewed as a rip-off for some, but for most, it’s a high-value service that’s still worth the price of admission. At the end of the day, time is money. And, in a way, DoorDash is selling time back to people, many of which see great value in not having to spend an hour grocery shopping and cooking at home, even if it’s the far better financial decision amid inflation.
For the second quarter, demand for food delivery was alive and well despite all the concerns about the macro climate, rates, and lingering inflation. DoorDash saw total orders surge 19% year-over-year to a whopping 635 million. Further, sales of $2.63 billion, up 23%, beat expectations, while net revenue margins also inched higher.
If DoorDash can clock in such remarkable quarterly beats in the face of inflation and other economic uncertainties, perhaps we may be underestimating the company’s ability to navigate a potential downturn in the economy.
So, even as the tech-heavy Nasdaq 100 Index (NDX) slips further into a correction, DASH stock, I believe, stands out as more of a tech staple that may be every bit as resilient as McDonald’s.
Though I don’t see the economy falling into recession, especially as the Federal Reserve and Bank of Canada become likelier to slash rates after the U.S. jobs data, it can’t hurt to be prepared for a mild economic recession. After all, nothing slays inflation better than a slight downturn in the economy.
Fast Food Deflation Could be a Huge Tailwind for Food Delivery
As dine-in restaurants, quick-service restaurants (QSR), and fast-food firms begin to feel the heat of deflation (especially McDonald’s), the case for ordering in and skipping the dishes over home cooking hasn’t been this strong since the pandemic lockdown days. Lower prices, promos, and discounts bode well for sales of the restaurant firms’ sales, but at the expense of margins. For DoorDash, though, it stands to benefit from a larger number of orders without having to take the margin hit to the chin.
It’s not just McDonald’s that’s getting aggressive with discounting and promos (think the $5 meal deal, which could outlast summer). Wendy’s (WEN), Burger King (whose parent company is Restaurant Brands International (QSR)), and others have followed suit to win back the consumer. As more consumers get on DoorDash to seize the broad range of meal deals and discounts, perhaps the DoorDash habit will be fed, even as the economy tilts towards a slowdown.
The big post-earnings bounce in DASH stock seems more than warranted. In fact, I think it could have more room to run as DoorDash looks to benefit from fast food deflation. At 4.9 times price-to-sales (P/S), shares are still cheaper than their five-year average of 5.1 times P/S.
Is DASH Stock a Buy, According to Analysts?
On TipRanks, DASH stock comes in as a Moderate Buy. Out of 27 analyst ratings, there are 17 Buys and 10 Hold recommendations. The average DASH stock price target is $144.32, implying upside potential of 19.2%. Analyst price targets range from a low of $115.00 per share to a high of $170.00 per share.
The Takeaway
DoorDash deserved a round of applause after its stellar second-quarter earnings showing. Even if the economy fades into year’s end, I’d look for more days like Friday and today, whereby DASH stock can dash higher, even without help from the rest of the market.
Further, as McDonald’s ramps up on value and ramps down on prices, expect the industry to follow suit. For DoorDash, that could mean more order volumes to capitalize on the deals to be had across the restaurant scene.
In a way, DoorDash stands to enjoy the feast of higher fast food sales without the heartburn of lower margins.
