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Key Takeaways
- DoorDash CEO Tony Xu announced that the company would be reducing expenses by letting go 1,250 corporate employees.
- The company is trying to cut expenses since operating expenses reached $2 billion in the third quarter, while revenue was at $1.7 billion.
- With 439 million total orders in the third quarter, DoorDash still lost $295 million. The company continues to struggle to become profitable.
You can’t ignore the news when companies that were thriving, announcing record revenue just a year ago, now make the news by announcing major layoffs. DoorDash is the latest company to announce layoffs in response to the current economic climate where the Fed is fighting soaring inflation with aggressive rate hikes. The increased interest rates are making consumers think twice about spending money and dropping investors’ confidence levels.
We’re going to look at the recent DoorDash layoffs and the earnings reports to see what the data suggests about investing in the food delivery app during this challenging time in the market.
What’s happening with the DoorDash layoffs?
DoorDash is laying off 1,250 people in corporate roles, which equates to 6% of its workforce. DoorDash had 8,600 corporate employees as of the end of 2021. The company will offer 17 weeks of severance, and health care will continue until March of next year.
These recent layoffs mean that DoorDash is joining other major companies like Amazon, Twitter, Meta, and Lyft in cutting staff in 2022. These companies experienced booms during the pandemic when everyone was at home and they couldn’t keep up with staffing requirements.
Now they have to scale back as consumers become conscious about spending with soaring inflation. Many of these companies have seen their market caps shrink dramatically and their investor confidence decrease.
In an official statement on November 30, DoorDash CEO Tony Xu discussed how the company experienced unprecedented opportunities during the pandemic. Hence, they had to accelerate the hiring process to keep up with the growth. The company ultimately failed to properly manage the team’s growth as it took on too many staff to match the current climate. Xu also commented on the company’s expenses:
“While our business continues to grow fast, given how quickly we hired, our operating expenses – if left unabated – would continue to outgrow our revenue.”
This was a key point from the memo as the company has struggled to turn a profit despite having a highly successful IPO at the end of 2020 during the pandemic boom.
The layoffs came at a slightly surprising time since we’re about to experience the holiday rush that often increases revenue due to more people ordering food for holiday-related events.
How is DoorDash performing financially?
DoorDash released its earnings report for the third quarter of 2022 on November 3 for investors. Here are some of the highlights from this report:
- DoorDash lost $295 million, which is much more than the $101 million loss from the same period a year ago.
- Revenue was $1.7 billion, up 33% year over year and higher than the $1.63 billion analyst estimate.
- In the first nine months of 2022, DoorDash generated over $70 billion in sales for merchants and over $25 billion in earnings for dashers (food delivery drivers).
- Total orders were at 439 million, which is up 27% year over year.
DoorDash shares went up about 14% in the after-hours trading when the company announced financial results that included higher sales and total orders than analysts had initially predicted. The total number of orders shot up 27% to 439 million, but that was not enough to help the company make a profit.
Considering the current macroeconomic environment, the 33% bump in revenue is impressive, but the company has to find ways to cut its expenses in order to be in the black.
How is DoorDash stock performing?
DoorDash stock closed at $52.71 on December 6, down about 63% for the year. This drop is even more newsworthy because DoorDash had a successful IPO at the end of 2020. While some analysts quickly pointed out that the Doordash IPO was ridiculous, the stock closed 86% higher on the day of its IPO than the starting price.
In its IPO filing, DoorDash boasted that its revenue had surged 226% in the first nine months of 2020 to $1.92 billion. The boost during the pandemic created the perfect conditions for the company to go public. This IPO gave DoorDash a market cap of $72 billion, which is an impressive number for what was a seven-year-old start-up at the time.
Analysts felt that the IPO was confusing because DoorDash lost $667 million in 2019 and $149 million in the first nine months of 2020. The significant issues that were brought up in 2020 are still present today. The company isn’t profitable, there’s a plethora of competition in the food delivery business, and there’s always the potential for demand to drop. As the pandemic restrictions were loosened, it was clear that many people were eager to return to dining out.
What is the financial outlook for 2023?
Going into 2023, we should consider a few key factors as we discuss the financial outlook for DoorDash.
Consumer spending habits are shifting
We will see how the company handles the stubborn inflation numbers and the possibility of a recession. During the pandemic, we saw consumer spending habits shifting as people were stuck at home looking for ways to stay entertained. Many people turned to food delivery services to stay at home. Now with inflation impacting the prices of everything, there are concerns that consumers will have to become more conscious of their spending as ordering food is viewed as more of a luxury than a necessity.
Data has shown that DoorDash has a 59% market share among food delivery apps. Uber Eats is in second place with 24%, Grubhub has 13%, Postmates has 3%, and Waitr has about 1%. As the market leader in the field, DoorDash has a competitive advantage, and the company has invested in expanding into new global markets.
DoorDash has stated that they expect adjusted EBITDA to fall between $85 million and $120 million for the current quarter. They also forecast that gross order value would be between $13.9 billion and $14.2 billion. Gross order value is significant because it shows how much customers spend on orders and the subscription fees.
New categories and international
DoorDash has been investing heavily in adding new categories and international markets. Even though DoorDash started in the restaurant business, the company has a vision of building a world-class local commerce marketplace covering many categories in different countries. DoorDash is currently available in 7,000 cities across the US, Canada, Australia, Japan, and Germany.
DoorDash recently hit a new milestone by forming over 75,000 non-restaurant partnerships with big stores like Dick’s Sporting Goods, Target, Sephora, and PetSmart, to name a few. DoorDash is working with these retailers to offer delivery services in response to on-demand consumer needs. The non-restaurant partnerships are also being used to promote DashPass, which is the membership program that allows users to get free deliveries.
The flip side of international expansion is that geopolitical and currency risks are difficult to forecast. As we saw with the soaring US dollar in 2022, there could be reduced profitability from operating globally. A company also has to invest heavily in marketing to establish a presence in a new country. There are no guarantees that these investments will pay off, which is a difficult situation for a company that hasn’t turned a profit yet.
Should you invest in DoorDash right now?
With shares down by over 60% for the year, some might feel that this is the right time to take a chance on investing in DoorDash. We must stress that investing in DoorDash right now would definitely be a gamble as the company has not been able to turn a profit in its 10-year existence. We also have to mention that DoorDash has to deal with issues like rising fuel costs, supply chain issues impacting restaurants, and labor shortages affecting the service industry.
The primary concern is that DoorDash still has not demonstrated how the current business model could be profitable. The company isn’t able to break even with the current fees that it charges, and it isn’t likely that consumers would respond favorably to an increase in fees as inflation woes have hit most households.
With an increase in revenue of 33% and the recent layoffs, there are hopes that the food delivery company could potentially break even in 2023. However, it’s still a risk considering we could have more rate hikes in the near future.
How should you be investing?
Seeing that many tech companies have dropped in value by over 60% makes it intimidating to figure out how to invest your money right now. Trying to figure out which stocks to invest in feels daunting as inflation concerns are cutting into sales.
In some good news, Q.ai’s artificial intelligence is here to do the hard work for you. The AI works tirelessly to build and manage a variety of specially-curated, AI-backed Investment Kits. You can also turn on Portfolio Protection at any time to protect your gains and reduce your losses, no matter what industry you invest in.
Bottom Line
As the market volatility of 2022 continues due to soaring inflation and aggressive rate hikes, many companies that are sensitive to rate hikes have been suffering. While people will always need to eat food, and with total orders reaching 439 million, there are some signs that DoorDash could turn business around in 2023. But we can’t ignore the inflationary pressures impacting consumer spending and investor confidence.
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