Food delivery giant GrubHub (NASDAQ:GRUB) recently announced a deal to acquire leading college campus food-ordering-platform Tapingo. The market reacted positively to the news, sending GRUB stock up a few percentage points. That means that GRUB stock added about $350 million to its market capitalization in response to a $150 million acquisition.
Does that really make sense?
Absolutely.Though the $150 million price tag ostensibly implies that the deal is nothing to write home about (GrubHub has a $12.5 billion market cap), I believe that the acquisition was actually critical for GrubHub.
GrubHub is the leading player in the hyper-growth but easily-commoditized food delivery market. The company needs everything and anything it can get its hand on to differentiate itself from the competition in order to maintain its market-leading position. The acquisition of Tapingo does that by enabling the company to dominate the college food delivery niche. That domination, in turn, will inevitably allow GrubHub to both expand its market share and increase awareness of its services.
Tapingo is probably worth more than $350 million to GRUB. If the acquisition results in even just a few percentage points of market share expansion, that would translate into additional revenue of $600 million or more. Thus, the fact that the market cap of GRUB stock rose by $350 million in response to the Tapingo acquisition makes sense.
Over the long-term, GRUB stock will be a winner, as long as the company can defend its market share. That will be tough do. But the Tapingo acquisition is a step in the right direction, and as a result, it is a material positive for GrubHub stock.
The Long-Term Growth Outlook of GRUB Stock Is Positive, But Has Risks
GrubHub stock has been one of Wall Street’s favorites over the past few years because the company has emerged as a leader in the food delivery industry. The industry is expected to become massive, much like e-commerce. Moreover, GrubHub has, much like Amazon (NASDAQ:AMZN) had in e-commerce, the advantages of being the first mover and the market leader.
From this perspective, many bulls see GrubHub as the Amazon of food delivery. Granted, food delivery is tiny relative to total commerce. Global spending on restaurants is estimated to be between $2 trillion and $3 trillion, while global spending on consumer products is estimated to be around $40 trillion. That means GrubHub’s addressable market is about 6% the size of Amazon’s addressable market.
But the restaurant market is still large enough to propel GRUB stock higher. Amazon’s retail business has an estimated value of $400 billion. If GrubHub’s business becomes roughly 6% the size of Amazon’s retail business, then the implied valuation of GrubHub stock is $25 billion. The current valuation of GRUB stock sits at $12.5 billion, so GRUB stock could potentially rally 100%.
Thus, if everything goes right and GrubHub morphs into the Amazon of food delivery, GRUB stock could double in the long run.
But there is one big risk to that thesis: competition. The food delivery space promises to be huge. But it also could easily become commoditized. How do you differentiate your food delivery services from those of the competition? The same way you differentiate ride-sharing services and e-commerce marketplaces: Price and convenience.
For GrubHub to maintain its leadership position, it needs to differentiate itself on price and convenience. If it doesn’t, then the whole bull thesis will be nullified, and someone else will become the Amazon of food delivery.
The Tapingo Acquisition Mitigates the Risks Facing GRUB Stock
The Tapingo acquisition makes a ton of sense for GRUB because the deal allows it to become more convenient for college students than the competition.
Tapingo dominates a niche of the food delivery market. Specifically, the company provides digital-food-ordering services for 150 college campuses across the United States. Combining that network with GrubHub’s food delivery services will allow GrubHub to enhance the convenience-value proposition of its service for college students.
That is important because college students are at the forefront of the at-home economy. Presumably, over the next decade as college students get jobs, they will turn into the driving force of the food delivery economy. If GRUB proves its enhanced convenience to college student, the company could establish some brand loyalty with them. That brand loyalty, in turn, should allow GRUB to increase its market share in the long-run.
The food delivery market is expected to be worth $80 billion in the U.S. alone over the long-term. Thus, 3% additional share would translate into $2.4 billion in additional gross food sales for GRUB. Assuming a 25% take rate, the extra 3% of market share would translate into $600 million in sales.
Long story short, by leveraging the Tapingo acquisition to grow its market share by a few percentage points, GRUB could increase its sales by hundreds of millions of dollars in the long-run.
Bottom Line on GRUB
GRUB is a long-term winner and headed for $200 and up as long as this company can defend its market share. The Tapingo acquisition is a step in the right direction and consequently is positive for GRUB stock.
As of this writing, Luke Lango was long GRUB.
