After years on the sidelines, McDonald’s (NYSE:MCD) has returned to the acquisition front. The Chicago-based fast-food giant announced that will buy Dynamic Yield, an artificial intelligence (AI) startup. To stay ahead of its peers, McDonald’s wants to build any competitive edge it can find for MCD stock, even if it comes from far outside the restaurant industry.
However, buying this company also takes McDonald’s outside of its core competency. Also, the size of the deal leads to questions on how much it will help McDonald’s stock.
Given the lack of potential the deal holds for changing the value proposition on MCD stock, investors should hold to their current view on the equity.
Dynamic Yield brings AI to McDonald’s Drive-Throughs
McDonald’s will buy Dynamic Yield, based in Israel, for over $300 million. The restaurant will utilize Dynamic Yield’s technology at its drive-through windows, specifically on menu displays.
With this AI technology, McDonald’s will utilize adaptable point-of-purchase displays. This amounts to the electronic version of the displays that inspire impulse purchases at the grocery store. Items displayed will hinge on factors such as weather and the customer’s choice of order.
AI could easily add to profits for McDonald’s as it inspires customers to add an ice cream cone during a heat wave or buy a hot chocolate during a cold spell. This purchase also builds off a recent approach to technology that includes order kiosks and Uber Eats delivery.
McDonald’s and the Tech Business
It is also the biggest acquisition by MCD in about 20 years. Still, I would question whether it changes the value proposition. For one, the deal places McDonald’s in the tech business. Dynamic Yield will continue to operate as a standalone company, serving current customers which include non-restaurant retailers such as Forever 21 and IKEA.
This probably speaks to the true motivation for McDonald’s buying the company, instead of merely becoming a client. By owning this retail AI company, peers such as Wendy’s (NASDAQ:WEN), Starbucks (NASDAQ:SBUX), or Yum! Brands (NYSE:YUM) will more likely lag McDonald’s on implementing AI-based drive-through displays.
Also, at $300 million, the deal amounts to a small fraction of the $144 billion market cap, and the $5.92 billion in net income McDonald’s earned in 2018. Hence, I would not expect Dynamic Yield to have the effect that Amazon Web Services had for Amazon (NASDAQ:AMZN). By the same token, I would expect only a marginal improvement in revenue for MCD stock.
For these reasons, the deal leaves investors with little additional reason to buy or sell. MCD appears to trade near its fair value as things stand now. The forward price-to-earnings (PE) is about 21.3, slightly below S&P 500 averages.
Before McDonald’s announced this deal, Wall Street forecasted a 2.9% increase in profits for this year. They also predicted net income that will grow an additional 8.1% in 2020. Dynamic Yield’s innovations could increase that growth somewhat.
I think long-term stockholders will see the most benefit. The annual dividend currently stands at $4.64 per share. It yields around 2.5%, and the company has hiked this payout every year since 1977.
Impulse purchases adding to the bottom line help ensure that the 42-year streak of dividend increases continues. Still, for everyone else, I think it will take more than a 21st-century point-of-purchase display to change the value proposition on McDonald’s stock.
The Bottom Line on MCD Stock
The Dynamic Yield purchase should not change anyone’s mind about MCD stock. Between the order kiosks and the electronic drive-thru displays, McDonald’s has taken the lead among peers in adding this technology.
However, it remains unclear how much success McDonald’s will have in overseeing a tech company. Also, the move gives the company something amounting to a point-of-purchase display.
It could lead to impulse buys which marginally boost revenue. It could also help long-term holders of MCD who depend on yearly dividend increases. Still, I see little in the deal that will change the mind of potential investors.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
