This Stock Soared 309% From Its 2022 Low -- 2 Reasons to Buy It Now, and 1 Reason to Stay Away

2024 is almost over, and the S&P 500 (SNPINDEX: ^GSPC) is on the cusp of delivering its second consecutive annual gain of more than 20%. The 2022 bear market sure feels like a distant memory right now.

DoorDash (NASDAQ: DASH) stock is currently up by 309% from its 2022 low point, thanks to the company's steady revenue growth, improving profitability, and expansion from food delivery into other markets. However, the stock is still trading 28% below its record high from 2021.

Can the recovery continue? Here are two reasons to buy DoorDash stock now, and one reason investors should be cautious.

The first reason to buy DoorDash: Accelerating revenue growth

To understand DoorDash's business, we have to start with its Marketplace Gross Order Value (GOV). This is the all-encompassing number that reflects how much money its customers spend on its platform. When a customer orders delivery from a restaurant, GOV includes the value of the food, the delivery fee, tips, and any other service fees.

DoorDash takes a percentage of the value of the food (in other words, the restaurant gives DoorDash a cut for facilitating the order), which becomes part of the company's revenue figure. During the third quarter of 2024, the company had $20 billion in GOV, which came out to $2.7 billion in revenue. Both numbers were record highs.

However, the GOV figure grew by 19% year over year, which was the slowest quarterly pace in 2024 so far. Revenue, on the other hand, grew by 25%, which was the fastest quarterly result in 2024. That's because DoorDash grew its net revenue margin (the portion of GOV that becomes revenue) to 13.5%, from 12.9% in the same quarter last year.

It achieved that result by improving efficiency, especially in its logistics operations, which allowed it to pocket more of its GOV. There was also an uptick in advertising spending from businesses that market their products on DoorDash's platform, and all of that money goes straight to the company.

Extracting more money from each order is great, but the fastest way to increase revenue is by increasing GOV (growing the pie). DoorDash is achieving that by expanding beyond food delivery and into groceries, and even retail products. More than 100,000 retailers are now on the DoorDash app, including giants like JD Sports and Ulta Beauty.

DoorDash CEO Tony Xu says the company is still in the very early stages of its shift into retail, so there could be significant growth to come.

Image source: Getty Images.

The second reason to buy DoorDash: Soaring profits

DoorDash has spent money more prudently over the last couple of years, in an effort to insulate its business from tough economic conditions led by elevated inflation and high interest rates. It's a big shift from the growth-at-all-costs strategy it adopted during 2020 and 2021, which led to blowout losses at the bottom line.

During Q3, DoorDash only increased its operating expenses by 14% compared to the year-ago period, to $2.6 billion. "Cost of revenue" accounts for the bulk of its operating expenses, which remains relatively stable as a percentage of the company's revenue, because it includes the money it pays to its delivery drivers.

Since its Q3 revenue grew by 25% and costs only grew by 14%, more money flowed to the bottom line. As a result, DoorDash generated a net income of $162 million -- the first quarterly GAAP profit in the company's history.

DoorDash's preferred measure of profitability is adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which is a non-GAAP metric. It excludes one-off and non-cash expenses like stock-based compensation, so it's a better reflection of the actual money flowing into the business.

During Q3, the company's adjusted EBITDA came in at a record $533 million, which was a whopping 55% increase from the year-ago period.

Accelerating revenue growth and improving profitability is a fantastic combination. It proves DoorDash can expand its business organically without burning through truckloads of money, which is the recipe for sustainable long-term success.

The reason to stay away: Valuation

Considering the positive picture I've painted above, it's no surprise that DoorDash stock has quadrupled over the last two years. However, it's starting to look a little expensive.

Since the company only just started generating a GAAP profit, we can't value its stock based on the traditional price-to-earnings (P/E) ratio. However, we can use the price-to-sales (P/S) ratio, which divides its market capitalization by its trailing 12-month revenue.

As of this writing, DoorDash stock trades at a P/S ratio of 7.1, which is a steep premium to its three-year average of 4.8. That period excludes most of 2021, when valuations were ludicrous across the entire tech sector, and DoorDash's P/S ratio topped 20.

Plus, a P/S ratio of 7.1 is almost twice the 3.7 P/S ratio of Uber Technologies (NYSE: UBER), which is one of DoorDash's competitors:

DASH PS Ratio data by YCharts.

Uber has a more diversified business than DoorDash. In addition to food and grocery delivery, it operates the largest ride-hailing platform in the world, and it also has a growing commercial freight segment. Uber generated $11.2 billion in revenue in its recent quarter across all segments, which is four times as much as DoorDash brought in.

Plus, Uber is partnered with 14 different developers of autonomous vehicles, so it's gearing up for a future that could completely transform its economics for the better.

Therefore, DoorDash stock might be a good buy at the current price for investors who are willing to hold it for five years or more, which will give the company time to grow into its valuation. Shorter-term investors might be better off staying away, or perhaps considering a stock like Uber instead.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends DoorDash, Uber Technologies, and Ulta Beauty. The Motley Fool has a disclosure policy.