Fox Advisors CEO on downgrading DoorDash after strong IPO debut

Fox Advisors Founder & CEO Steven B. Fox joins Yahoo Finance Live to discuss why the company downgraded DoorDash after its strong IPO debut.

Video Transcript

- All right, let's turn our attention now to the biggest story in financial markets this week, which is new issues coming to the market. As we mentioned at the top of the program, Airbnb shares more than doubled in yesterday's trading session. And on Wednesday we saw shares of DoorDash rise some 80% in their debut.

Joining us now to talk more about DoorDash is Steven Fox. He is the founder and CEO at Fox Advisors. So Steven, you downgraded DoorDash, which makes sense. Stock went up 80% on its debut.

As you were thinking about the stock ahead of the IPO, based on, you know, what you saw in the [? S-1-- ?] and obviously the market cap now has exploded just in a couple of days. How are you thinking about the business? And how excited are you still by DoorDash's prospects? Maybe backing out, you know, a doubling in one trading session?

STEVEN FOX: Right. Those are a lot of questions packed in there. First of all, thanks for having me. I would say two points. One on the long term-- I think the value of the network is significant.

The intrinsic value they've created to the local merchant back to the consumer is going to have increasing value over time. You can think of it sort of like a Verizon or an AT&T in that way. And also the technology that they're building, the backbone of it-- from Machine Learning to the domain expertise that they have in the field is important.

However, having said all that, it's really hard to put a valuation in the next 6 to 12 months that would sort of justify going up another 20%, 30%. I think the stock probably has to gain some seasoning here. We need to see how management communicates its financial targets with the street publicly. And see what type of growth environment they're going to be in. They're definitely in a big growth environment though.

- Steven, how profitable is DoorDash next year?

STEVEN FOX: Depends. One of the big questions we have is how much they want to invest in adjacencies. So one of the big opportunities for example, is to get into groceries, get into farming--

- Yeah, I can hear you.

STEVEN FOX: --and get into convenience stores. I think all those things are big opportunities, but you're going to have to spend to expand. Can they do that next year--

- I have a--

STEVEN FOX: --at that time they have huge incremental margins.

- --webcam.

STEVEN FOX: When we look at the numbers from [INAUDIBLE] by months, for every dollar of incremental sales they generated, they brought $0.35 down to the bottom line in terms of EBITDA. So if they continue on that path, then you could see hundreds of millions of dollars of EBITDA generated. But they really need to communicate their investment plans to the street.

- Doesn't everything sort of need to go perfectly, Steven for the price where we see it now to be justified? I mean, we haven't even really dug as much into the competitive landscape out there for these kinds of services.

STEVEN FOX: Yeah, so it's early days for sure. People are pricing in more than what's going to happen in the next 6 to 12 months. They're going to face regulatory hurdles from time to time as we've seen with Uber and Lyft. They're going to face competition.

Uber delivery is trying to expand out from the big cities now to compete with them in suburbs where I think they put together a really good competitive moat. So yeah, there's going to be issues. At the same time, remember this is a company that was growing 80% year over year on the top line before COVID. And that was supported by a secular trend that they were just starting to dig into.

So there's going to be a lot of growth that can sort of be-- allow them to get some forgiveness from the street if there's other issues. And then like I said, it depends on how they invest as well.

- Steven, if I did my math right, you have been an analyst on the street for, what 30 years? What would you compare this week to what we saw with DoorDash, Airbnb-- what other time period is it comparable to? And are you concerned on how some of these money-losing IPOs are coming out of the gate?

STEVEN FOX: So first of all, thanks for adding up my experience. You left out that I started when I was 12 on Wall Street. But in terms of what I would compare it to, I would have to go back to sort of the technology bubble.

It's different in the sense that these companies seem to have much more of a backbone and an experience behind them. DoorDash obviously is only an eight-year-old company. Uber delivery has only been around for four years.

But these are now services that are more intertwined into our way of doing business, and way of communicating or getting around and getting deliveries then they were when there were more prospects around fiber optics. For example, back in the late '90s, early 2000s.

But it does bother us to see companies getting valuations pre-revenue. So there's been a number of companies that are still three, four, five years out that are coming public. Where it's going to be hard for the average investor to put a valuation on it when we're still a few years away from the technology being proven out. I don't think that's the case with say, a DoorDash or a Lyft or an Uber. It goes back to more of the issues we talked about before.

- And Steven, just finally before we let you go. How careful do investors need to be around the lock-up expiration for some of these companies that have gone up so much in their early days of trading. And I think, you look at the Robinhood investor, I'm not sure that they really thought that much about lock-up expiry, but that can be a major event for the stock price.

STEVEN FOX: Yeah, for sure. It's very hard to predict how much of that impacts it. The timing is always-- you know, the timing's there in the filings. But how much actually comes into the market, and in what type of orderly fashion also depends. And obviously, depending on what the market backdrop is, it can impact it.

But that's definitely something to keep in mind. And another reason just to sort of take a little bit of caution towards DoorDash for the time being, understand, you know, how they're going to communicate with the street. Understand their strategy better. And you know, see if we get a better opportunity.

- All right. Steven Fox, the founder and CEO at Fox Advisors. Steven, great to get your thoughts this morning. Talk soon, have a great holiday.

- Thank you.