GrubHub is the leader in online food delivery in the US - 35% market share, UberEats is #2 with 29% market share
The food delivery industry has only penetrated about 6-7% of its total addressable market of US$200 billion (which is also growing)
For the sake of comparison, e commerce has penetrated 10% and online travel booking has penetrated 41%, so the food delivery industry is still in its infancy
The business was formed in 2004 by current CEO and another partner - both programmers
Over the years, it has grown both organically and via a number of acquisitions (it owns a variety of brands now, including Yelp deal)
The business has now signed up 95,000 restaurants in 1,700 cities across the US and its active users have increased to 16.4 million (In Q3, it handled 416,000 food orders per day)
Company is still investing heavily to build its infrastructure, driver network and marketing spending is also rising to gain market share
The business doesn’t charge a subscription fees but charges commission from restaurants for listing, placement, delivery etc
The take rate for listing/placement is around 13-15% and it charges an additional 10% for a sponsored listing
For delivery, the business charges an additional fees - tips are always paid to the drivers
Through intense nationwide advertising, the business has built a solid brand and it also collects vast amounts of data which is used for personalisation
The downside is that the industry is competitive - UberEats, Amazon, Doordash etc but it is a huge market and multiple players can compete - doesn’t appear to be a ‘winner takes all’ sector
Recent independent research has shown that 75-80% of users don’t switch to different food delivery apps and Grubhub has first mover advantage
Revenue, GTV and user growth has been torrid since inception and the business has been profitable for years
Growth numbers are presented below -
5-yr revenue CAGR = 52.69%, 3-yr revenue CAGR = 39.09%, latest quarter = 52%!
5-yr net income CAGR = 67.46%, 3-yr net income CAGR = 59.79%, latest quarter = 72%!
During last year’s stock market sell off, the stock declined 50% and over the past 2 months, it has been building a base (getting ready to break out?)
The valuation is fair now (1.5 PEG) - analysts are expecting 25-28% CAGR over the next 5 years which is probably too conservative, so valuation could be even more attractive
At present, the company generates almost US$1 billion in revenue and if the industry continues to develop, this is expected to increase around 8x over the next decade
Analysts are expecting 20-25% operating margin at scale in 10 years and at that point, net income could be around $2 billion
If you slap 22 multiple on $2 billion profit, you get a market cap of around $40-44 billion
Current market cap is $7 billion, so stock has potential to rise around 6x and produce 19-20% CAGR until 2029
Autonomous fleets are a wildcard - if autonomous ride hailing fleets become a reality in a few years, Grubhub will benefit as this development will eliminate/reduce the need for drivers, thereby lowering operating costs
The biggest risk is that UberEats or Amazon destroys them via a price war which will hurt margins for the entire industry
Finally, the Board of Directors is sound with reputable people from major firms
Admittedly, this business doesn’t have a wide ‘moat’, but it does have scale and the industry is poised to grow significantly over the next decade. Accordingly, I’ve recently put on a starter position.
I hope this has been helpful and if you have any comments or would like to criticise my thesis, don’t hold back.
Best,
GM