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Joe has 5 years experience with equity and derivative trading and 1 year experience in fixed-income and global currency market. He's specialized in energy futures trading, short term momentum trading and long-term options strategies. He also had working experience in investment banking, M&A... More
  • What Do We Expect From GrubHub Seamless (GRUB) 3 comments
    Mar 2, 2014 9:13 PM | about stocks: GRUB

    What Do We Expect From GrubHub Seamless (GRUB)

    "GrubHub plans to list itself on the New York Stock Exchange under the ticker symbol "GRUB." Its offering is being led by Citigroup andMorgan Stanley." (Dealbook -nytimes)

    IPO Awaits

    As market sentiment remains bullish and economy continues its recovery, capital starts flowing back into risky assets from safe assets. We are seeing more and more new stock offerings while the tech sector gets hotter and players are expecting another strong year in 2014. The largest IPO of the year came two days ago from Candy Crush creator, King, which revealed that it was seeking $500 million through a listing on the New York Stock Exchange (NYSE) and other well-known companies who had IPO or had filled IPO in past 12 months - Twitter (NYSE:TWTR), Go Pro, Square, A10 and etc.

    (click to enlarge)

    Technology does make our life easier, doesn't it? Sometimes you are surprised how much better off our lives are with the help of technology. Instead of pulling out your cell phone to dial those numbers and then converse with the restaurant get your order, now you can shorten the process by just a few clicks. "More people are ditching phones and ordering takeout online - and one company plans to profit in a big way from that. " GrubHub seamless, the result of a merger between two start-up companies from last year, had become the largest US online food ordering provider and just filed for a confidential initial public offering according to the news.

    Just like other pre-IPO start-up companies, investors really have no clue how much the company should be valued at or how much and when the company will offer on the marke. As far as I know, I see the IPO coming as early as April or May due to higher-than-average market liquidity.

    How They Generate Revenue - Business Model

    It doesn't take a lot to understand how restaurants generate their revenue but as a value-adding service provider - how is GrubHub Seamless generating its revenue from helping customers and restaurant owners? To be straight-forward the revenue generation can be summarized as this graph.

    (click to enlarge)

    I am certainly not trying to oversimplify their revenue generating model and I am sure they have other streams which are consistently generating revenue for them, however, just to be plain and simple in this case- GrubHub and Seamless make money by collecting a small percentage of restaurants' sales (normally 10% -15% sometimes higher) from the food orders they facilitate and also by offering advertising to restaurants who want to be on the top of the list when a customer search for food that they want. In 2013, at the time when merger happened, GrubHub said, "Its service includes more than 20,000 online ordering restaurants; Seamless says its service has more than 12,000 restaurants. Together, they process more than 90,000 orders a day, the companies say." However, according to the lasted data, the combined company process about 150,000 orders a day and had generated more than 100 million revenues in the year of 2012.

    Rising Star or Cash Cow?

    Due to limited financial insight for these two companies, it is fairly hard to measure company's growth, however, there is one way we can estimate it. According to past interviews with company's top executive Matt Maloney, two important KPIs come out to our sight when we are trying to estimate company's growth profile - the number of affiliated restaurants and the number daily processed orders.

    GrubHub Seamless has 28,000 restaurants across 600 cities that post menus or allow customers to order through the company's websites. That number was around 22,000 prior the merger from last year and it was about 14,000 combined from a year ago - that gives us a 26% CAGR on the affiliated restaurants. Also the number of order processed daily has increased significantly as well (almost a 67% increase on YoY basis).

    In addition to that, "there were 4,442 more restaurants in the U.S. in fall 2012 than there were in fall 2011, according to a recent U.S. restaurant census conducted by The NPD Group, a leading global information company." The total number of U.S. restaurants is now 616,008 -- a .7 percent increase over last year, based on NPD's fall 2012 ReCount®, which is a count of commercial restaurant locations in the United States compiled in the spring and fall each year. Although it was the data from last year, it still indicates a positive momentum on consumers' spending on food and dinning service.

    Segment

    System Type

    Fall 2011

    Fall 2012

    PCYA*

    TOTAL REST

    ALL

    611,566

    616,008

    0.7%

     

    CHAINS

    273,259

    276,238

    1.1%

     

    INDEPENDENTS

    338,307

    339,770

    0.4

    *Percent Change from a year ago Source: The NPD Group/ReCount®, Fall 2012

    As the economy continues to recover, individuals and families are more confident on their future earnings which results a potential higher spending on food and dinning service. To sum up, this industry will be performing well consistently in the next couple years and it won't suffer too much from major economic turnarounds since people still need to eat on a daily basis.

    Aggressive Expansion

    We can't predict future but we can look back at history. If we check Facebook (NASDAQ:FB), Google (NASDAQ:GOOG) and other major tech companies, after they went public they've been aggressively purchasing other small-sized tech companies who have favorable growth potentia by either cash or stock. In fact, just 2012 alone, there were 56 deals happened for companies in internet industry. Now the question should be brought up --will Grubub and Seamless continue

    (click to enlarge)its aggressive expansion plan by going out and acquiring other small sized companies after going public?

    They are very likely going to pursue such a strategy either within the industry that they are currently operating in or outside of the industry so they could diversify their business into multiple fields. In that way, they can provide a more diversified revenue base. GrubHub Seamless is already a huge portfolio companies within the food ordering industry -they currently own a group of brands that includes MenuPages (menupages.com and Allmenus (allmenus.com) and the combined coverage is over 600 cities in U.S and London.

    If you look at company's current footprint, the current set up (with offices in Chicago, New York, Salt Lake City and London) clearly indicates company's capability for future expansion across the world. All the existing infrastructure and the amount of cash the company is going to receive after an IPO event all confirmed a potential aggressive-expansion strategy that the company could implement in the coming years.

    Buy or Hold?

    All being said, GrubHub Seamless has a very unique and profitable business model and they operate in a growing industry plus their well-prepared and expandable business infrastructure really give them the edge to be compete with some other high PEG stock in tech sector. I personally think it would be a good buy and long-term hold stock if the IPO was not overpriced by the underwriters.

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Comments (3)
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  • JKenser
    , contributor
    Comments (476) | Send Message
     
    I am really excited about this IPO.. I hope it gets bad coverage as I believe it will be huge in the future. Having over 7 years in the industry, its not difficult to imagine grubhub in every small mom and pop shop from chinese to pizza. It will save the restaurant money from having to operate a website and will offer more exposure as a one stop shop for people wanting food on the fly.
    4 Mar 2014, 10:36 AM Reply Like
  • wowbu
    , contributor
    Comments (5) | Send Message
     
    Author’s reply » Hi Jkenser,

     

    I am really excited for this IPO as well and in fact if the IPO is underpriced I will probably take a huge chuck of portfolio investing in this stock. I've been switching back and forth from Foodler and Grubhub - they are equally good. Again.......once they have their infrastructure ready..they will be able to expand globally.
    14 Mar 2014, 04:03 AM Reply Like
  • JKenser
    , contributor
    Comments (476) | Send Message
     
    I guess we were both spot on with GRUB. Hope you made some good money!
    13 Aug 2014, 09:04 PM Reply Like
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