Food Delivery Service Spices Things Up

Over the years, Americans have become increasingly dependent on their phones. In fact, around 86% of millennials own a smartphone and use it to bring the lifestyle they want right to their door. As a result, the service industry is taking off in new ways, and it’s opening up a lot of areas that we can invest in. Take food, for example. It’s as old as the human race itself, but now we have a next-generation way to make money off its evolution.

According to the Principal Financial Group’s annual Financial Well Being Index, restaurant food is still the number one thing that Americans spend their money on. It makes up 24% of their budgets, compared to 20% on groceries and 18% on entertainment. For lunch alone, Americans spend an average of $53 a week, or $2,746 a year.

But not all of that food is being eaten within the restaurant. Instead, more and more of that cash is now fueling the online ordering movement, which is the real trend we want to play here. The number of phone and internet restaurant orders surged 18% last year to 1.9 billion, according to research firm NPD Group. That’s a lot of money being brought into the industry, and a lot of big name companies are looking to get their piece of the pie.

In fact, a big headline that caught my eye last month was a report that highlighted Facebook’s (FB) efforts to expand its presence in the food delivery service game, including a new “order food” option that was recently added to the main navigation menu.

Say you’re looking at a local restaurant’s Facebook page and decide you wouldn’t mind having some of that food show up at your door. You’d then click the order button, submit payment through FB and one of the company’s partners will deliver your food from the restaurant.

Facebook’s announcement wasn’t ignored by current food delivery king GrubHub (GRUB), which connects diners to over 50,000 local restaurants in 1,100 cities. The company processes 324,000 orders per day nationwide through its app and is a favorite of the millennial generation.

The day the Facebook announcement was made, shares of GRUB fell over 3% at one point as investors saw it as a direct competitor to the current leader. The selling pressure only lasted a few days though, and the stock has since found its footing. But the competition isn’t going to stop there.

It may surprise you to learn that fast food giant McDonald’s (MCD) already has well-established delivery services in Asia and the Middle East, and earned nearly $1 billion in global delivery sales last year. MCD is trying to duplicate that success in the United States, partnering with Uber and its UberEats app to have the burger of your choice show up at your door at all hours of the day or night.

Even diner chain Denny’s (DENN) is getting in the game, partnering with digital ordering company Olo last month to launch its third-party delivery to about 50% of its stores nationwide.

Even though there are already so many players, the food delivery trend still has a glaring amount of expansion potential. According to Morgan Stanley, the addressable restaurant spend is $210 billion, of which the online delivery sector only comprises $10 billion or less than 5%. Another way to look at the sector is that the restaurant industry has a $490 billion market. As more diners move away from traditional dining and toward home delivery, the addressable market available to companies like GRUB, MCD and DENN will only increase. Online delivery could realistically make up 10% of restaurant sales in the coming years, which would be a near five-fold increase from today.

That’s what makes this a NexGen mega-trend to watch. Specifically, I have my eye on GRUB, which is personal favorite of mine – I live off it whenever I stay in New York! The company is a stand-out leader with a strong millennial following, and it also has the earnings and revenue growth to back up its share prices. GRUB is surprisingly profitable even though it could be considered an earlier-stage technology play. The company earned $0.89 a share last year and is expected to grow its bottom line by 27% in 2017 to $1.13 a share. That’s the kind of fundamental support I like to see in a potential NexGen stock.

GRUB has been trading well recently and climbed close to an all-time high last Friday before catching a downgrade on Monday from Morgan Stanley. The firm cited increasing competition from UberEats as well as a new Amazon (AMZN) delivery service, Amazon Restaurants, which is only for Prime members and has so far been launched in 20 cities. On the other hand, Wedbush believes that GRUB could be a logical buyout candidate for Amazon.

Regardless, I’m keeping my eyes open. There is a lot of potential in this space and a lot of money to be made, and our proven NexGen system allows us to find the right opportunities at the right time.

Article printed from InvestorPlace Media,

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