The Takeaway
Despite Uber stock’s rally in the past nine months, it still trades at a discount to DoorDash’s stock. But Uber has the potential to grow faster than DoorDash, which argues in favor of a premium valuation.
For almost the entire time since DoorDash went public in late 2020 the restaurant-delivery service has traded at a premium valuation to Uber. Lately the gap between the two stocks has nearly closed, although the much bigger ride-hailing and delivery firm remains the underdog of the pair.
While that made sense early on, when the pandemic blitzed Uber’s ride-hailing business and turbocharged DoorDash's service, things have changed. Uber's ride-hailing revenue has surged well past pre-pandemic levels, while its Uber Eats food-delivery business has mushroomed in size. That transformation has turned Uber from a perennial money-loser into a cash machine, churning out $1.7 billion in free cash flow in the second quarter alone.
DoorDash’s revenue is still growing faster than Uber’s—but not in a way that is necessarily sustainable. In fact, growth in the number of orders on its service, as well as their total dollar value, has been steadily slowing over the past 12 months or so.
DoorDash has managed to curb the impact of that slowdown by drawing in more advertising and by signing up more restaurants and grocery stores, which can both widen its appeal to consumers and make it easier for drivers to pick up more orders more quickly. But neither of these maneuvers can drive top-line growth indefinitely.
Uber is in the reverse position: total consumer spending on its delivery platform has lately been growing faster than what it reports as revenue, which implies its topline has more potential to keep expanding.
Uber’s stock has rallied strongly since last fall, lifting it well above its initial public offering price for the first time. And yet Uber is currently trading at 19 times the next 12 months’ earnings before interest, taxes, depreciation and amortization, compared to DoorDash’s 21 times, according to Koyfin. That discount suggests investors don’t fully appreciate Uber’s potential.
A DoorDash spokesperson argues that DoorDash’s business has proved “relatively insensitive to changes in consumer spending, particularly when compared to categories like travel.”
While that’s true, ride hailing has lately also appeared to be less sensitive to consumer sentiment than might have been the case in the past. That’s likely because both Uber and Lyft have raised prices, making their services more of a luxury item. The CEOs of both companies this week said they weren’t seeing any signs of weaker consumer spending, unlike companies such as Airbnb and theme park operator Disney. Uber CEO Dara Khosrowshahi noted pointedly that “our consumers tend to be higher income.”
Efficiencies and Advertising
One of the biggest arguments in favor of Uber is that its revenue growth appears to be more sustainable than that of DoorDash.
That’s most noticeable in food delivery, where the two companies compete head on. In that segment, Uber’s gross bookings—the total value of customer orders—grew 16% in the second quarter, about four percentage points below DoorDash’s rate. But pull the camera back a bit and you see that Uber’s growth rate in the segment has doubled since the start of last year, while DoorDash’s has steadily slowed.
DoorDash’s revenue growth has also slowed sharply, although its top line is growing faster than the number, and volume, of orders. That discrepancy is partly because it has added more restaurants and grocers to its network, which has made it easier for its delivery drivers to complete more orders in the same amount of time.
That has helped DoorDash effectively lower the amount it pays those workers in wages per order, which has the effect of increasing its take of each order and its revenue. DoorDash securities filings have attributed its recent revenue growth partially to unlocking such efficiencies.
But there’s a limit to how efficient a network can become—you can never shrink the time it takes a messenger to deliver a grocery order to zero—even if it takes DoorDash a while to hit that ceiling.
DoorDash has also boosted revenue by selling space on its app to advertisers, which restaurants and consumer brands typically use to reach new customers. This business is growing quickly, DoorDash executives say, but there’s only so much money it can generate from ad sales on its app without alienating customers.
As DoorDash CEO Tony Xu put it to investors on the company’s earnings call last week, “Ads do have a negative impact on the consumer experience.”
Moreover, a slowdown in the growth of users puts a ceiling on how much money advertisers may want to spend to reach those users. As Xu noted, “It’s a healthy marketplace that enables an ads business, and not the other way around.”
To sustain long-term growth, DoorDash needs to find ways to consistently drive up the number of orders placed on its platform each quarter—which means attracting new customers.
Uber’s Structural Advantage
Uber’s diversification in both ride hailing and food delivery also gives it a big advantage over DoorDash and Uber’s rival in ride hailing, Lyft.
As Morningstar analyst Malik Ahmed Khan pointed out in a May report on DoorDash, Uber “benefits from cross-selling its ride-hailing and delivery services, possibly attracting more users and in the future, maintaining a higher percentage” of the customers in its paid membership program, Uber One, than DoorDash can in its similar offering, DashPass.
Ride hailing is a fundamentally higher-margin business than food delivery, according to Andrew Boone, an equity analyst at Citizens JMP.
That helps explain why, for example, Uber’s Ebitda in the second quarter accounted for 3.9% of its gross bookings, compared to 2.2% for DoorDash. (The two figures are generally comparable, although it’s worth noting that DoorDash says it includes tips paid to drivers in its gross bookings figure, while Uber does not.)
There’s also reason to believe Uber’s food-delivery growth may accelerate, thanks to a recent tie-up it has arranged with grocery-delivery firm Instacart. The deal allows Instacart customers to order meals from restaurants on UberEats directly through the Instacart app. The arrangement has helped Uber attract new customers, its executives said, especially in suburban markets, where it’s historically been less successful than in cities.
Uber and Instacart cozying up to one another could even presage an acquisition, which would help Uber’s food-delivery arm expand into groceries faster than would otherwise be possible. Uber could easily afford the purchase: Instacart’s enterprise value is roughly $7 billion. Uber has over $6 billion in cash on its balance sheet, while its $140 billion in market capitalization gives it the scale to use its stock.
As questions about consumer spending intensify, the prospects for Uber and DoorDash will be in the spotlight. If consumer spending worsens, Uber should be better positioned, thanks to its track record of building and expanding a network that serves a wider variety of different needs, from ordering groceries to getting a ride to work
