This Fast-Growing Tech Stock Has Already Achieved Profitability

Consumers are squeezed for time like never before, and they are increasingly willing to pay a premium for services that make their lives easier. That's why millions of them have signed on to GrubHub's (GRUB) platform. GrubHub connects hungry diners with local restaurants to help them get a meal delivered whenever they are in a rush.

In this segment from Industry Focus: Tech, host Dylan Lewis is joined by Motley Fool contributor Brian Feroldi to discuss why GrubHub has become a market darling and why it's good to be the top dog in food delivery.

A full transcript follows the video.

This video was recorded on June 8, 2018.

Dylan Lewis: Why don't we talk about one of these first businesses that you like? This is a name that I think some folks, particularly in cities, might be familiar with, that's GrubHub.

Brian Feroldi: I think this is a company, of the three we're going to talk about, that a lot of people have already heard of and used. GrubHub is a leading platform for ordering takeout from local restaurants. These guys have about 14.5 million users. They're operating in 1,600 cities and they have more than 80,000 restaurants that are participating on their platform. So, you add all those numbers together and they literally fulfill more than 400,000 orders every single day on their app and website.

Lewis: And they own quite a portfolio of different properties in this space. It's not just that they own their GrubHub main platform.

Feroldi: Correct. They've been quite acquisitive over the last few years. They own a couple of companies that listeners might be familiar with, like Seamless, Eat24, Allmenus, MenuPages, and they also have partnership deals with a lot of other big tech companies, such as Yelp, Foursquare, payment processors like Venmo and NCR. More recently, they've been partnering directly with restaurant brands themselves, such as Yum! Brands, which owns KFC and Taco Bell, and Jack in the Box, those are two companies that they recently partnered with to offer delivery.

Lewis: Beyond just the conventional e-commerce flip to mobile experience that we're seeing with a lot of general consumer traffic, why do you like this business so much?

Feroldi: In general, I think that this company is all about convenience for users. I'm a believer that, over time, more people are going to want to have food delivered to them. If you think about the traditional delivery model, most people, where they live, they have two choices for delivery: it's either Chinese food or pizza. These guys are trying to expand that to include way more restaurants, so that diners can really get any food that they want delivered to them.

The reason that I like GrubHub in particular is because I think that the home delivery market is going to naturally become a winner-take-most type of market. What I mean by that is, whoever is the top dog, the No. 1 player, and offers the most restaurants on their platform, is naturally going to be a site that consumers will go to when they're hungry. Consumers want choice, so if GrubHub has the most restaurants that are listed locally, that's a natural attraction. The same works for restaurants. Restaurants want to be on the platform that has the most diners.

Right now, GrubHub is the top dog in this industry, and they're really protected by almost double-sided network effects. They attract the most diners, and that in turn attracts the most restaurants. And both of those numbers can grow exponentially.

Lewis: The strategy here reminds me of what we see with Match in the dating space. You have this one property that has basically said, "We're going to buy up anything that looks attractive in this space and put it under our umbrella."

Feroldi: And that's exactly what they've done, that's the reason they've been highly acquisitive. The management team here, this company is run by its founder and CEO, they realized that you have to be the top dog, you have to be the No. 1 player, to attract the most customers. That's one reason why they've been so acquisitive.

One strategy that they've used to grow the supply side, the restaurants that sign up, is they actually don't charge restaurants a subscription fee or any sort of fee for listing on their site. Instead, restaurants get charged and GrubHub makes a commission on each food sale that they pay. Restaurants pay about a 15% commission. It's almost a no-brainer for them to sign up. There's very little risk, they can sell full-priced food out of their kitchen to diners that would not have dined with them anyway. That's one reason why restaurants are flocking to GrubHub, in addition to having the most diners. There's almost no financial risk for them to join.

Lewis: Yeah. When you first put this company on my radar, I saw that number of 80,000 restaurants participating at the moment. And I was like, "Well, how many restaurants are there in the United States?" I did a quick search, and I've seen some ballparks around 600,000. I know, over the last maybe three or four years, they've doubled that restaurant number. To think that that is what's in front of them still makes me think that there's a lot of growth in this industry, and there's a lot of growth to be had for GrubHub specifically.

Feroldi: Last year, GrubHub processed about $3 billion worth of total food sales. Management believes that their addressable market opportunity currently is about $200 billion. If you believe that number, they've essentially scratched about 1% of their market opportunity. While that $3 billion is total gross food sales, GrubHub takes a cut of that, but their revenue is growing extremely quickly because, in part, of acquisitions, and also, more customers and more restaurants signing up.

One of the reasons that I really like GrubHub is, it's definitely the leader in this industry. It's definitely growing. Their founder is currently the CEO, he's still running the show. And, as small as GrubHub is, they are already profitable, and they've been profitable for several years. They're generating cash. Last year, their profits grew by 68%. This is a company that's absolutely growing very, very quickly. And, their company is regarded as a pretty good place to work. Their CEO gets great reviews.

I know we talked about valuation earlier. There's no doubt that GrubHub is expensive. GrubHub's currently valued at about 13X sales, 92X trailing earnings. But this is a company that I think is very high quality, it's a leader, and it has so much room for growth that I think that it's a good buy even way up here.

Lewis: That was a super strong bull pitch there, Brian. Is there anything that you see on the horizon that really worries you about this business?

Feroldi: I think the biggest threat longer-term is competition. I said before that I think this is a winner-takes-most market, but there are a couple of very strong competitors that are trying to get in here. One of them is a little company called Uber, and they have their platform called Uber Eats, which is trying to do home delivery. Another one is Square, and they have what's called their Caviar service, which also does food delivery. These are well-financed companies with tech talent and big resources, so if they do want to make a big push, it could hurt GrubHub.

Having said that, I think that GrubHub has a big enough lead that they'll still be able to grow even with these competitors. But, that's certainly something to keep an eye on.