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Amazon’s Next Victim: GrubHub (AMZN, GRUB)

Over the years, Amazon (AMZN) has been a major force in crushing a variety of brick-and-mortar operators like Circuit City and Borders. But lately, it looks like the company has also been taking a toll on mega operators like Walmart (WMT) and Macy’s (M), whose stock prices have taken big hits.

GrubHub185Interestingly enough, AMZN may be a threat to even nimble startups, as seen with its play for the fast-growing restaurant delivery market.

No doubt, the opportunity is enormous. According to last year’s GrubHub IPO filing, Americans spend about $67 billion per year on takeout from independent restaurants.

As for AMZN, its Prime Now service launched back in August and is currently available in 20 major cities in the U.S., such as Los Angeles, Portland and Seattle.

According to a recent post in Techcrunch:

“Amazon is planning to continue a rapid expansion for the service, with more markets coming online later this year and a busy Q1 2016 already in the works. The company’s plan is to bring restaurant delivery to everywhere Prime Now is available.”

The Prime Now service is part of the core Prime service, which costs $99 per year and provides two-day free deliveries as well as access to media streaming and storage. As for the restaurant delivery service, a Prime customer will get free two-hour deliveries and there is a $7.99 charge for a one-hour drop-off. All in all, this should be yet another strong reason for customers to keep their Prime subscriptions.

But it also seems like a good bet that the restaurant delivery service will encourage new sign-ups. In other words, even if the Prime Now service doesn’t improve the bottom line, it will still likely boost the overall revenues from the AMZN ecommerce platform. Based on research from Consumer Intelligence Research Partners, a typical Prime member spends about $1,200 per year — double the average nonmember spending.

GrubHub Can’t Compete With AMZN Restaurant Delivery

Amazon’s new restaurant delivery service is a big problem for the startups in the space. In fact, investors are already taking note, as seen with the steep drop in the shares of Grubhub (GRUB) down 33% year-to-date. And there’s probably more carnage to come.

Now keep in mind that GRUB is an early player in the space, having been founded in 2004. The company built a software platform allowing restaurants to manage take-out processing. But there was a hitch: GRUB didn’t provide the actual delivery.

The lack of delivery has proved to be a big issue. GRUB is in the process of changing its service, but that is quickly becoming an expensive task. In the meantime, other startups have been rushing ahead, getting substantial amounts of venture capital — more than $1 billion last year, according to CB Insights, quadrupling the 2013 total.

And GRUB seems to be feeling the pressure, as seen with the deceleration in revenue growth — down from 51% to 38% over the past year. Unfortunately, during the latest quarterly report, GrubHub reported weak guidance. The company is expecting revenues of $98 million to $100 million this quarter, down from the Street consensus of $101 million.

Despite all these problems, GRUB stock is still trading at a hefty 6 times sales. By comparison, YELP trades at a sales multiple of 3.7.

So, GRUB stock will continue to feel the pain as it faces intense competition, flagging sales and the need to invest heavy amounts in a new delivery infrastructure. Investors who want to benefit from the new restaurant delivery trend are better off with a diverse, growing business like AMZN.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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