Shares of Grubhub (NYSE:GRUB) soared in mid-May after the Wall Street Journal reported that Uber (NYSE:UBER) is in serious talks to acquire the food delivery giant. As of this writing, GRUB stock is up more than 35% on the news.
What’s the investment implication of this big news? There are two big implications. First, buy GRUB stock. Second, buy UBER stock.
Why? Also two big reasons.
First, there’s no doubt in my mind that this deal is going through: Uber is going to buy Grubhub. It was reported by the Wall Street Journal (arguably the most credible source on Wall Street), it makes a ton of sense and there’s little reason why any shareholder would vote against this acquisition.
Second, if the deal does go through, it’ll be a huge win for Uber, and will increase the value of Uber stock. Because this is rumored to be an all-stock deal, as Uber stock goes up over the next few months, GRUB stock will go up, too.
Big picture: Uber is going to acquire Grubhub, it’s going to be a hugely value-additive deal, and both UBER and GRUB stock will trend higher for the foreseeable future. That makes each of them solid buy candidates now.
Uber Will Buy Grubhub
Make no mistake. This is not a “hot air” report. Uber will buy Grubhub in the near future.
The food delivery space was due for consolidation. This is a hyper-growth market. The U.S. meal delivery service market has consistently featured 20%-plus sales growth over the past several years, including 24% growth so far in 2020.
But it’s also a largely commoditized market with a ton of non-dominant players. That is, from a consumer perspective, there isn’t much differentiating Grubhub from Uber Eats outside of maybe price and maybe a few delivery options. Because of this, consumers in the meal-delivery space have very little loyalty, no single company is that dominant and all of them are losing a lot of money in a bid to “under-price” the competition and win market share.
Uber acquiring Grubhub would fix these shortcomings, by creating a dominant player in the market that could rely on size and synergies to drive growth and not price cutting.
In other words, this acquisition makes a ton of sense. And it’s no surprise. Pretty much every analyst in this space has been talking about a major acquisition for several quarters, if not years.
As such, don’t discount the WSJ report. It’s highly likely that Uber will buy Grubhub, and soon.
A Big Win for UBER Stock
Uber acquiring Grubhub would be a huge win for UBER stock too.
The combined Uber Eats / Grubhub entity would control approximately 50% of the U.S. food delivery market and immediately become the market’s biggest player without much competition. Uber could rely on that unparalleled size and reach among U.S. consumers to force more restaurants into exclusive deals with its meal delivery platform. More exclusive deals would further differentiate the platform, attracting more consumers, which would attract more exclusive deals.
Lather, rinse, repeat.
At the same time, significant overlap in diners, restaurants and markets between Uber Eats and Grubhub would lend itself to equally significant cost-cutting synergies. Some of those synergies will help boost margins. Some of them will passed onto consumers in the form of lower prices — and competitors won’t be able to match those lower prices because they don’t have the scale or synergy to profitably do so.
In other words, Uber buying Grubhub would lay the foundation for Uber to go from commoditized, money-losing food delivery player, to price- and option-differentiated, profitable food delivery giant.
Accordingly, UBER stock will rally ahead of this deal passing. Because the deal is rumored to be all-stock, as UBER stock rallies, GRUB stock will rally, too — so buy both UBER stock and GRUB stock to play this blockbuster deal.
Bottom Line on GRUB Stock
In anticipation of this deal, UBER stock will rally, because it’s a huge win for Uber Eats. Further, because this is rumored to be an all-stock deal, as UBER stock rises, so will GRUB stock.
Thus, the best way to play this blockbuster deal is simple. Buy GRUB stock. Buy UBER stock. And let these talks turn into action and, eventually, a formal acquisition.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long UBER.