GrubHub Inc’s (GRUB) share price fell 2.34% to close at $34.65 on Jun 26, 2014, following the news that Amazon.com (AMZN) is launching a food takeout service. (Read: Amazon Rolls Out Local Food Takeout Business)
Amazon’s entry will certainly create ripples in the booming food takeaway market. Its service is seen as a direct threat to GrubHub and DeliveryHero. Per TechCrunch, Amazon can also take the acquisition route to expand its services and GrubHub can be a prospective candidate, in our view.
With increasing usefulness of smartphones, popular mobile app developers are commanding a hefty premium for getting acquired. Priceline’s recently proposed acquisition of OpenTable and Facebook’s (FB) WhatsApp buyout are appropriate examples.
Per Bloomberg, taxi-fetching service, Uber, was recently valued at $17.0 billion, which is a record for a technology start-up. GrubHub’s much smaller competitor, Caviar, (250 restaurant partners) received a $13.0 million Series A funding in May that included investors like Andreessen Horowitz.
GrubHub’s popular service and much larger scale of operations favorably places it as an attractive acquisition candidate. The company has approximately 30,000 restaurant partners across 600 cities. GrubHub aims at partnering with 350K independent restaurants in the long run.
Per GrubHub, Americans spent approximately $70.0 billion on takeout at these independent eateries, which is expected to jump rapidly due to higher mobile usage. The company noted that approximately 44.0% of orders came through mobile devices in the recently concluded first quarter.
At the end of the first quarter, GrubHub had 3.85 million active diners, up 49.0% year over year. Gross food sales were $433.0 million that jumped 44.0% from the year-ago quarter and implies a run rate of approximately of $1.73 billion for the full year. Its high margin business model and debt free balance sheet are other notable positives.
Apart from Amazon, we believe that GrubHub’s growing popularity will attract other large technology companies such as Google (GOOGL), eBay and Expedia. The recent Priceline-OpenTable merger has rejuvenated the M&A landscape, particularly in the hot local services market. We believe that it is only a matter of time before this market will see further consolidation and GrubHub can be the next target.
Currently, GrubHub has a Zacks Rank #3 (Hold).
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