Fox Advisors Founder and CEO Steven Fox joins Yahoo Finance Live to discuss DoorDash earnings, user and sales growth, and the impact of inflation.

Video Transcript

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- Shares of DoorDash are surging ahead after topping third-quarter revenue estimates despite reporting a wider-than-expected earnings loss. Gross order value ticked up higher, rising 30% year-on-year as the food delivery company expects strength of consumer spending to continue into the fourth quarter.

Here to break it all down is Steven Fox, Fox Advisors founder, CEO. Steven, good to talk to you today. Yes, this was a very strong quarter for DoorDash at a time when we've heard about consumers pulling back on spending. But we did hear the company caution that consumer spending could deteriorate faster or "to a greater degree than we anticipate." These are their words. What did you take away from the numbers we got yesterday in terms of how these higher costs are starting to weigh on consumers and how that could potentially affect things on the platform?

STEVEN FOX: Yeah, that's an interesting question. And thanks for having me. So I think there's a couple of things going on that are encouraging to investors this morning. One is what you just pointed out, is the resiliency of their demand, their gross order value growth. It was up substantially, including with an acquisition they did in Europe, which I was concerned about, called Wolt, which was up 60% year-over-year from a much smaller base, but still very good growth.

And the second thing is I think what they're doing, and which was smart, is providing a little bit more insight into how profitability is growing. So there's a lot of investment going on, which they've always advertised since the IPO. But now they're providing insight into the core growth in their restaurant business, where their profits are up 50% year-over-year and where they're seeing very good incremental margins. So I think that was encouraging as well to investors.

- Yeah, the good news for DoorDash is that users are still on the platform and ordering. It did sound, though, that they're starting to see some trade-downs. It's not necessarily the high-end restaurants if you used to order from there. You're still on the platform, but you're ordering from other areas that may come with a cheaper price point. I mean, at what point do you think, because of the higher costs overall, some users start to say, well, maybe I don't need that delivery as frequently as I used to use it?

STEVEN FOX: Well, it's also important to remember that when you look at their numbers, there's inflation embedded into their top line, right, because you're buying a pizza that costs 10% or 15% more than it did a year ago. And then when you look at what's going on with the consumer specifically, what they think they're seeing is smaller basket sizes. So maybe instead of ordering that extra egg roll or the extra pizza, you're being more proficient with how much leftovers you want. So that's happening as well.

I think in general, if you look at consumer trends, they are generally holding up because one, this is a very underpenetrated market. There's no area where they're more than 10% of their available market, whether you look geographically or by restaurants, et cetera. And then secondly, food is going to be less cyclical. And then thirdly, as they add subscribers, those subscribers generally are more frequent users of the app, especially as they add new categories, like groceries and convenience stores, which are really gaining scale now.

- DoorDash certainly unique in that they've largely been focused on deliveries. When you look at their competitor, for example, like Uber, they've obviously got the ride-hailing side, the food side. To your point, we've seen DoorDash diversify their offerings. But when you look at those two names side by side, who do you think is better positioned to ride out some of these economic headwinds?

STEVEN FOX: That's a really interesting question. I think at this point, given how strong the travel backdrop is, especially in the US, that Uber would be the preferred play overall. It's not to say that DoorDash in and of itself doesn't have a viable business model that's going to be successful over the long term. But if you're trying to balance risk and reward, Uber is actually priced at a more attractive valuation, we think, and offers you that hedge with the travel component, which is very strong right now.

- Finally, when you look at where you are with the stock, you've got an equal weight rating on the stock. What would it take for you or what would you need to see to change that?

STEVEN FOX: So what we tried to express in our report this morning is that there's been some incremental changes in terms of how we understand the business and how they're expressing what's going on with the business to investors. Most importantly, on the incremental profits that are dropping down, you can get a better feel for some of these investments turning to scale. And so that does lead you to believe that EBITDA growth can be stronger next year.

I think we need to see a little bit more performance relative to the current macro into the end of the year. I think what they did, what they printed yesterday and what they guided to is definitely going to put a firm floor on the stock. It's probably going to be volatile for a while. And then we'll evaluate going forward. But we were definitely intrigued by what we saw off of that print.

- It certainly looks like you're not the only one, if you look at the stock reaction today. Steven Fox, Fox Advisors founder, CEO, good to have you on.

STEVEN FOX: Thank you.