GrubHub Inc (NYSE:GRUB) stock, less than a year after closing at $34 per share on its first day of trading, is trading at nearly $46 a pop today. Its 35% gains easily trump the 13% return seen by the S&P 500 over the same period.
And yet GRUB stock could rally another 35% in the next year — if it’s acquired, that is.
Betting on a GrubHub buyout sounds like a questionable strategy on its face. But given several recent big-time M&A deals in its space, I have a harder time believing GRUB stock won’t get gobbled up … soon.
Why a GrubHub Stock Buyout Will Happen
GrubHub, an online and mobile platform for placing local pick-up and delivery orders, has seen two major peers and rivals get snapped up in the last 10 months alone. That bodes well for the buyout prospects of GRUB stock.
First, in June 2014, online travel booking powerhouse Priceline Group Inc (NASDAQ:PCLN) snapped up OpenTable Inc (NASDAQ:OPEN) for $2.6 billion, a 46% premium to OpenTable’s stock price. RBC analyst Mark Mahaney called the deal a “no-brainer” at the time, as the opportunity to derive more revenue from each Priceline user was simply too tasty to pass up.
Then, in what further validates GRUB stock as an attractive buyout candidate, Yelp Inc (NYSE:YELP) snapped up Eat24, a direct competitor of GrubHub’s, for $134 million in cash and stock. Again, this buyout makes an absurd amount of sense: While Yelp is primarily a consumer reviews site, many users visit its site to check out local restaurants and menus before ordering or visiting themselves.
Following in the footsteps of PCLN, online travel site Expedia Inc (NASDAQ:EXPE) or Expedia spinoff Tripadvisor Inc (NASDAQ:TRIP) could reasonably eye GRUB stock in an effort to expand their e-commerce offerings and boost revenue.
More likely, however, would be a buyout at the hands of Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) or Amazon.com, Inc. (NASDAQ:AMZN). GOOG competes with both PCLN and YELP in online travel booking and local business reviews, respectively. A GrubHub buyout would complement its suite of online services and integrate nicely with Google Maps to boot.
As for Amazon? Let’s be honest, it’s a jack of all trades and it has the resources. And importantly, a former AMZN vice president, Girish Lakshman, just joined GrubHub’s board, so the connections are there.
Buyer Beware
While I believe GrubHub’s explosive revenue growth (85% last year), success in mobile and attractive niche make GRUB stock an obvious buyout candidate, investors should always consider the risks before making any rash decisions.
The rapidly rising number of $1 billion-plus deals in the mergers and acquisitions space supports the case for a buyout of GrubHub, which sports a market cap of $3.8 billion. That said, consider the last two times $1 billion-plus M&A deals approximated today’s levels.
Source: viewfromtheblueridge.com
Yes, that’s 2000 and 2007: the height of the last two stock market bubbles and the dawn of two separate recessions.
At the end of the day, counting on a GrubHub buyout places a lot of stock in the “greater fool” theory wherein investors chase after investments they know are overvalued but simply believe they can sell for a higher price. Inevitably, that game eventually ends in the bubble popping and the later speculators losing boatloads of money.
Even if there isn’t a devastating stock market pullback that sends GrubHub stock plunging before it can get bought out, its suitors may wait for the stock price to begin falling before making an offer. OpenTable stock fell 16% in about three months before PCLN stepped in with its $2.6 billion deal.
In other words, playing GrubHub stock isn’t for everyone.
Personally, I’m not easily spooked by risk, and I’d like to buy GRUB stock before someone else does.
As of this writing, John Divine owned shares of GOOG stock and GOOGL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
