DoorDash Faces Too Much Pressure to Recommend DASH Stock

The recent correction in some of the world’s largest markets has made it difficult for many investors to find safe investments that provides high returns on investment. It has been a rough year for DoorDash (NYSE:DASH) stock, but this doesn’t mean the company is destined to fail permanently. But recent events indicate it will be tough for the food delivery platform to recover lost gains anytime soon.

The biggest piece of news upsetting DASH stock bulls is an agreement between Amazon (NASDAQ:AMZN) and Grubhub that could extend to Prime Members. The deal will result in fee-free deliveries on orders for a year. Amazon will get warrants worth 2% of Grubhub’s shares, enough to influence the stock market. In addition, an additional 13% of shares is conditional on the deal bringing Grubhub a certain amount customers.

Dash dropped following the announcement of Amazon’s deal. With its clientele and resources, Amazon will gain a strong foothold in the food delivery market, putting pressure on other players like DoorDash to fall in line or face the consequences.

There’s reason to believe that DoorDash is a good investment because of its post-pandemic growth. Other factors like the positive predictors, growth potential and price make it a smart pick for many investors. In May, DoorDash submitted impressive operating results in the first quarter, putting them on track for upcoming year-end targets. DoorDash’s delivery service is still unrivaled, and its hiring practices remain compelling, despite a temporary decline from previous trends.

A stock buyback is an action taken by a company to help increase investor confidence. The board of directors authorized a $400 million buyback to boost investors’ confidence.

However, it would help if you considered the recent developments in the food delivery space with caution, since they could hinder the company’s progress.

I am neutral on shares until we gain more clarity regarding the Amazon and Grubhub situation; it’s better to stay on the sidelines.

DASH Stock Is Losing Too Much Money

With the Amazon business deal in the background, DoorDash will need to streamline its operations and ensure that it delivers on the bottom line. This means focusing more on the customer interaction and delivery process. It will need to stop focusing so much on generating revenue and efficiency to achieve this.

Delivery businesses in the U.S. surged during the pandemic. However, with the improvement of conditions and removal of restrictions, many feared that this industry would become a cash cow with significant valuations and revenues. That hasn’t been the case in general, because the company is thriving. Its latest earnings report showed revenue growth of 35%, so we can see the pandemic-induced surge is not a thing of the past.

With the industry growing, so too are the number of delivery businesses. The companies include giants like Uber (NYSE:UBER) and Grubhub, as well as local stores with delivery services to provide convenience for their customers. DoorDash is not just a food delivery app. It also has other aspects that can prove to be quite lucrative. The key is that the company has a business model that will thrive in this environment.

The company has been posting revenue growth. But profitability is the main concern. It posted an annual loss of $468 million in the previous year, the loss increasing by $7 million from the prior period. The company will need to lower operating costs for a profit in the medium term. Allowing more business streams does increase revenues in the short term, but increased expenses are not uncommon.

What Is DoorDash Doing to Expand?

The company is announcing a subscription model for its clients, which should have a two-prong effect. Firstly, it will guarantee a specific revenue every month. Secondly, people are more likely to order more since they have a subscription, which often has lower prices than buying things outright. Subscription-based services help create a loyal customer base and eliminate competition with other companies.

Interestingly, the food delivery company is looking to expand its operation within the United States. Up until now, its focus has been on perishable goods. However, to continue expanding its clientele successfully, it will have to expand into other areas of business, including non-perishable items.

Many grocery stores are seeing a huge increase in customer demand due to food delivery services. With more diverse offerings, it will be able to offer new subscriptions and services, which drive customer loyalty and increase average ticket value. DoorDash has also started advertising on its website — this is an easy way to earn revenue and improve profitability.

In addition, DoorDash has partnered with Loblaw, a Canadian firm, to deliver groceries in Canada in June. It will help the company to boost its revenue and profits. The deal is crucial to the company’s further expansion beyond U.S. borders and into Japan, Germany, New Zealand and Australia.

Is DASH Stock a Buy?

Although DoorDash sees its monthly active users and order volume grows, it’s still not the right time to invest in this stock. Despite an economy struggling with rampant inflation and elevated gas prices, you can probably expect Dash to keep adding new customers.

However, DoorDash seems to be struggling. It needs to lower operating costs to maximize profits. And these profits can only be made if customers are drawn in constantly by new services. It’s a catch-22, because adding services will also add to costs. DASH stock does not tick all the boxes for me in an environment where growth stocks are falling.

On the publication date, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.