The S&P 500 (^GSPC -0.33%) is considered the single best benchmark for the overall U.S. stock market because of its scope. It tracks the performance of 500 large companies that account for about 80% of domestic equities by market value.
DoorDash (DASH 0.63%) was added to the S&P 500 on March 24 during the quarterly rebalancing. The stock has returned 295% since January 2023, and still has a consensus rating of “buy” among Wall Street analysts. Also, the median target price of $226 per share implies 18% upside from the current share price of $191.
Here’s what investors should know.
Historically, stocks have generated strong returns after joining the S&P 500
Companies must meet certain eligibility criteria to be considered for inclusion in the S&P 500. Most important, they must have positive GAAP earnings, a market value of at least $20.5 billion, and a sufficiently liquid stock. The index is weighted based on float-adjusted market value, and its components are rebalanced quarterly.
During the past decade, 177 companies were added to the S&P 500, meaning more than one-third of the index was replaced. That aligns with the long-term turnover rate. Importantly, stocks returned an average of 12% in the 12-month period following their inclusion in the S&P 500 over the last decade. We can apply that data to DoorDash to make an educated guess about what might happen in the future.
Specifically, DoorDash traded at $199 per share when the market opened on March 24, the day it joined the S&P 500. The stock price will increase 12% to $223 per share in the next year if its performance aligns with the historical average. That nearly matches the median target price on Wall Street and it implies 17% upside from the current share price of $191.
Readers may wonder why stocks typically increase after joining the S&P 500. One answer lies in the numerous investment products linked to the index that must be rebalanced. For instance, asset managers that offer S&P 500 index funds must buy DoorDash shares to ensure their product accurately reflects the benchmark index. Beyond that, stocks enjoy a bit more visbility after joining the S&P 500.
Those forces can create demand that drives shares higher, at least temporarily. But whether DoorDash is a worthwhile long-term investment is another question entirely. Read on to learn more about the company.
Image source: Getty Images.
DoorDash is the market leader in U.S. restaurant food delivery, but the stock is a little pricey
DoorDash is the leader in U.S. restaurant food delivery with 67% market share, according to Bloomberg. That scale makes the network effect inherent to its business especially strong. By that I mean its platform becomes increasingly valuable to drivers and restaurants as consumers increase, and it becomes increasingly valuable to consumers as more drivers and restaurants participate.
Scale also affords DoorDash a data advantage. Every order informs algorithms that make recommendations, helping brands more effectively personalize advertising on the platform. Mark Giarelli at Morningstar in a recent note wrote, “We believe that virtuous cycle will persist, and Dash will remain a leader in the growing industry.” He also highlighted the potential for margin expansion as it delves deeper into grocery and adds drone delivery.
DoorDash in the fourth quarter reported accelerating growth in total orders and gross order value, which hit 19% and 21%, respectively. But revenue rose 25% to $2.9 billion as take rate increased, meaning the company kept a larger percentage of each dollar spent on its platform. Meanwhile, adjusted EBITDA rose 55% to $566 million. Management expects similar growth in the first quarter.
Despite its strong business, DoorDash has a somewhat concerning valuation. The company only achieved GAAP profitability recently, so it’s more sensible to consider price-to-sales (PS) or price-to-free cash flow (PFCF) in this situation. The current PS ratio of 7.8 is well above the one-year average of 6.1, and the current PFCF ratio of 46.3 is well above the one-year average of 35.8.
Having said that, DoorDash’s sales and free cash flow are growing relatively quickly, so the present valuations are not absurd. And if the company maintains its momentum in the coming quarters, the current multiples may look quite reasonable in hindsight. Investors with a time horizon of at least three years can consider buying a small position today.