Popular online food delivery platform Grubhub (NYSE:GRUB) is reportedly for sale, according to a Wall Street Journal report from earlier this week. Amid intensifying competition and aggressive promotional spending that is pinching margins, Grubhub is evaluating a broad range of strategic options that could potentially include selling itself to a larger company.
Despite the fact that Amazon.com (NASDAQ:AMZN) shut down its own U.S. food delivery service, Amazon Restaurants, just six months ago, speculation has emerged that the tech behemoth could potentially be a suitor for Grubhub.
Why acquiring Grubhub makes perfect sense
Shares of Grubhub had jumped last summer when Amazon announced its exit, so it would be somewhat ironic if Amazon ended up making an offer for the company. That pop was temporary, though, as disappointing third-quarter earnings results subsequently pushed Grubhub stock to 52-week lows.
It's worth noting that Amazon led a $575 million investment round in U.K.-based delivery service Deliveroo just months before shuttering Amazon Restaurants, suggesting that it is still interested in local food delivery. Analysts interpreted that series of events as a signal that Amazon may prefer to jump into food delivery with a splashy acquisition instead of building a service from scratch.
This week, Mizuho Securities renewed speculation that Grubhub may be a compelling acquisition target for Amazon, according to Business Insider. Analysts at the firm believe that Amazon considers the "food delivery business as a complementary service to Prime members, similar to its acquisition of Whole Foods and PillPack," according to the report.
Amazon Restaurants simply failed to gain traction against more prominent brands like Uber Eats, DoorDash, and Grubhub, but scooping up Grubhub could accelerate the company's timeline and quickly give it one of the leading platforms in the sector. Grubhub now owns around 30% of the market, according to recent estimates from Second Measure, trailing DoorDash's 37% share. Uber Eats is the No. 3 player, with an estimated 20% share.
Mizuho estimates that a Grubhub acquisition would cost around $7 billion, which is about 40% higher than Grubhub's current $5 billion market cap and nearly 60% higher than the company's valuation before the acquisition rumors broke.
It's worth noting that Amazon has already been leaning heavily on the gig economy, hiring an army of contract drivers for its growing last-mile delivery operations while cutting out third-party carriers like FedEx for Prime shipments. The company delivered a whopping 3.5 billion packages through its in-house logistics shipping network last year. Amazon has also been expanding its local grocery delivery service, Amazon Fresh, bringing items from Whole Foods locations to customers' doorsteps for free as an included benefit of Prime.
Scale is a critical factor of viability, and Amazon Restaurants simply wasn't ramping quickly enough. Buying Grubhub would complement numerous parts of Amazon's sprawling offerings, while still being cheaper than the $13.7 billion acquisition of Whole Foods (Amazon's largest to date). Jeff Bezos should probably pull the trigger on this one.