I like to keep an eye out for winning businesses that are shaking up the status quo. That's why I've had my eye on GrubHub (GRUB) for some time. Investors who bought into this fast-growing company at its IPO in 2014 have already tripled their money. While the company sports a nosebleed valuation and is currently trading near a 52-week high, I still think that investors can win by buying into this business today.
Image source: GrubHub.
Bringing food delivery into the 21st century
In 2004, Matt Maloney was hungry and decided that he was in the mood for delivery. However, he quickly grew frustrated when he realized that the only way for him to place an order at his favorite local restaurants was over the phone using out-of-date paper menus. As a web developer, Maloney sensed an opportunity and co-founded a company that would simplify this cumbersome process.
Fast forward to today, and Maloney still is the CEO of GrubHub. His company has grown to become the country's leading online and mobile platform for restaurant takeout. Diners in more than 1,600 cities can now quickly place an order at more than 80,000 participating restaurants by using the company's website or app. The flexibility and convenience of using GrubHub have made the company so popular that more than 400,000 hungry diners order from the platform every single day.
Becoming the top dog
GrubHub's amazing growth has been driven by that fact that it's a win-win proposition for both sides. Hungry diners easily can order takeout from dozens of restaurants while on the go without having to make a call or keep paper menus on hand. Restaurants get to sell full-price food to customers who wouldn't have dined with them otherwise.
CEO Matt Maloney. Image source: GrubHub.
Maloney realized early on that this industry was going to become a winner-take-most type of market. The reason is that hungry diners naturally want use the platform because it offers the biggest selection of local restaurants.
At the same time, restaurant owners want to be listed on the platform with the largest number of diners. This fact creates a double-sided network effort that makes it nearly impossible for the No. 2 player to compete.
Maloney decided to gobble up the competition as fast as possible to ensure that GrubHub retained its top-dog status. The company has bought out companies like Seamless, Eat24, AllMenus, and MenuPages over the last few years. When combined with organic growth, GrubHub's platform has grown by leaps and bounds:
| 2014 | 2015 | 2016 | 2017 | |
|---|---|---|---|---|
| Active diners | 5.0 million | 6.7 million | 8.2 million | 14.5 million |
| Daily grubs | 183,000 | 227,000 | 274,800 | 334,000 |
| Resturants | 33,900 | 40,000 | 50,000 | 80,000 |
Table source: Grubhub.
The Eat24 acquisition is particularly notable because the company was formerly owned by Yelp (YELP 1.57%). When the deal was finalized, the two companies agreed to team up to offer online ordering directly from Yelp's platform. The move further cemented GrubHub's leadership position and reach.
Monetizing the platform
In an effort to grow the platform as quickly as possible, Grubhub made the decision to forgo charging restaurants subscription fees to be listed on the site. Instead, restaurants are charged a commission of about 15% for each order. Restaurants also retain the option to pay a higher commission rate in exchange for more prominent exposure on the company's app.
Beyond commissions, GrubHub also offers its restaurants the option of having the delivery handled by the company itself. Restaurants that choose this option pay GrubHub a delivery fee. When combined, these factors make joining the company's platform an extremely low-risk proposition for restaurants, especially since the company helped facilitate $3.8 billion in gross food sales last year.
With billions of dollars flowing over GrubHub's network in 2017, those commissions and delivery fees generated $683 million in total revenue. The numbers have grown large enough to allow the company to reach profitability and consistently crank out free cash flow, too.
While GrubHub's monstrous growth has been impressive, the company still thinks that it's just scratching the surface of what's possible. Management estimates that its addressable market opportunity is around $200 billion, so there's ample reason to believe that the company's still in the early innings of its growth phase.
A good place to work and an incentive leader
I'm a firm believer that companies that receive high marks from their employees stand a much better chance of outperforming over the long term. The reason is that great workplaces naturally attract the best and brightest and can go a long way toward keeping top-notch employees happy.
GrubHub scores pretty well in this regard. A full 82% of employees approve of CEO Matt Maloney on Glassdoor.com, and 71% of them would recommend the company to a friend. The company receives 3.7 out of 5 stars overall.
While these numbers are not flawless, they're pretty solid overall and suggest that the company is an attractive place to work. They've also been trending higher over time, which is a good sign.
I also like that CEO Maloney personally owns more than 885,000 shares of company stock. At current prices, that's worth about $90 million, so you can bet that he's motivated to see Grubhub continue to succeed.
Risks to keep in mind
While I love that GrubHub has already achieved profitability and is the top dog in a huge market, there are a few risks for potential investors to keep in mind. First off, UberEATS and Square's Caviar food-delivery service clearly show that plenty of other big tech companies want a piece of the action. While I think that GrubHub's first-mover advantage and scale will keep it on top, those competitors can't be dismissed.
Second, relying on acquisitions to drive growth can be notoriously difficult to pull off. It also loads the company's balance sheet with goodwill. If those acquisitions fail to pay off, then big writedowns could be coming down the road.
Third, while CEO Matt Maloney's position in the company is worth $90 million and likely represents a vast majority of his net worth, that still represents less than 1% of shares outstanding. That's not a huge number considering that he's the founder and this business is only 14 years old.
Finally, Wall Street has caught on to this company's growth story and has priced the shares accordingly. The stock is currently trading for more than 92 times trailing earnings and nearly 14 times sales. These are lofty numbers, so if this company's growth story fails to live up to expectations, shareholders could be in for a world of hurt.
GrubHub is a buy
It's rare to find a company that's growing quickly, profitable, led by its founder, is a good place to work, and has a long runway for growth ahead. While there are plenty of risks to consider, I think that GrubHub is an attractive enough business to warrant an investment today. That's why I plan on buying a few shares for myself as soon as the Fool's trading guidelines allow.
