Why Grubhub Is Up

In this episode of Market Foolery, Chris Hill and Motley Fool analyst Jason Moser discuss the latest headlines from Wall Street. They've got some piping-hot news from the food delivery space, and they talk about its impact on businesses and investors. They go through the earnings report of a specialty retailer, updates on the telehealth/telemedicine space, and much more.

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This video was recorded on May 13, 2020.

Chris Hill: It's Wednesday, May 13. Welcome to Market Foolery. I'm Chris Hill, and someone else was supposed to be on the show today, and an hour before the show, an hour before the time we were supposed to start recording, that person said, "Hey, my laptop is basically not working at all, and I'm not going to be able to help out." I said, no problem. I put up the Bat Signal, and Jason Moser, who is in fact Batman, answered. So Jason Moser, thanks for being here.

Jason Moser: Hey! Always a pleasure, happy to help out in a pinch.

Hill: We've got some earnings; we're going to dip into The Fool mailbag. We're going to start with a story that actually broke yesterday afternoon after you and I had finished recording yesterday's Market Foolery, and that is Uber (UBER -2.95%) making a bid for Grubhub (GRUB). And shares of Grubhub ended on Tuesday up nearly 30%. It's down a little bit today, but these conversations are ongoing.

Before we get into the particulars, what was your reaction when you saw that? Because mine was that there are some acquisitions that, in the moment you look at them and you think to yourself, well, that makes perfect sense. For me, this isn't one of them, but what do you think?

Moser: Well, I don't know if it's something I would say makes perfect sense, but I do see the connection there. I mean, I certainly see why Uber would be thinking in this direction. And I think that for Grubhub, this could be maybe the best way out. I don't know. I mean, the economics of food delivery are really tough. We've certainly seen that in Grubhub's margins and financials since it's been a publicly traded company. And unfortunately, it's not a market that really rewards exclusive relationships. I mean, people are just looking to get their food from point A to point B, and restaurants want to be able to do that and make sure that they can rely on the partners that are delivering that food.

So for me, you know, as I said, this is not a market that rewards exclusive relationships. So we saw, for example, when Shake Shack released their earnings here last week, they had exited an exclusive relationship with Grubhub and were utilizing more partners, Uber Eats being one of those. So from the restaurant's perspective, you know, they want to try and bring as many of those partners as they can. But it is a market where you're certainly seeing -- consolidation almost needs to happen, because otherwise it's going to be really difficult for a lot of players to be successful in this space, but you could see where maybe a couple of players could be successful in this space.

And I think that with Uber, you know, we've always asked the question, how are they going to leverage that network beyond just, you know, shuttling people around? And Uber Eats is definitely one of the ways to do that. And Uber Eats is certainly performing pretty well. In quarter 1, they generated $4.7 billion in gross bookings. That was up 54% from a year ago, and revenues accelerated in that line of work. Take rates are accelerating as well. So they're seeing a lot of success for obvious reasons right now. I mean, folks are looking to have more food delivered.

And I think with Grubhub, this might just represent the best opportunity for the business and for shareholders, because otherwise they're going to be stuck in this perpetual battle for very, very incremental profits. I mean, it is just not a super-high-margin business. And for restaurants, they need delivery now more than ever. So I think that'll probably continue on for some time, but it's definitely a space where consolidation is starting to happen. And I actually could see Grubhub and Uber getting together there and creating, really, a massive food delivery network that even really extends beyond restaurants. Uber Eats is incorporating grocery, for example. They have, what, 4,000 partners in 35 countries with companies like Carrefour, for example, and Cisco.

So they're leveraging that network in good ways. And I think this is a sign of things to come for Uber that could be good. I mean, it's obviously still hemorrhaging cash, and they're going to raise some more debt, it sounds like, but if this is a deal that happens, it sounds like it would be an all-stock deal, and now they're, kind of, hemming and hawing over the valuation, but I wouldn't be surprised to see this happen.

Hill: It's funny you mentioned that. I was talking with our colleague Abi Malin, and she's a Grubhub shareholder, and she made it very clear to me, she's not interested in Uber stock. [laughs] She was happy to see the spike in Grubhub shares. She would much rather prefer this be a cash deal, because she's not looking for Uber stock, but you know, it'll be interesting to see how the valuation shakes out here, because right now with this spike and little bit of a pullback today, Grubhub's valuation is $5.3 billion, they've said they would sell at a valuation of $6.1 billion, so that's another 15% upside from where it is here.

Moser: It is. And you know, these companies will go through negotiations to try to figure out what makes the most sense, and that's kind of the nice part about all-stock transactions from the company's perspective. You know, they don't have to dole out physical currency. I mean, shares are a currency, but it's not really affecting their pocketbook. Investors are kind of the [laughs] ones that potentially get screwed there.

And I agree with Abi: I'm not really interested in Uber's stock today. I think it's a fascinating business to follow. I'm cautiously optimistic that they will be able to leverage that network over time and do more things with it, but I think it's going to take a while. And clearly, it's going to take a long time for them to even achieve any meaningful profitability.

So yeah, from the company's perspective, that all-stock deal makes perfect sense. From the investor's perspective, yeah, if I'm a Grubhub shareholder and this ends up happening and I get those Uber shares for that deal, [laughs] I probably would look at going ahead and selling those Uber shares and putting that money to work elsewhere, because any way you put it, food delivery is just a really tough business.

And we saw, not all that long ago, where Square unloaded the Caviar side of that business. I mean, they dipped a toe in that market, thinking that might be something complimentary to their business. It turned out it really wasn't. It turns out it's just really hard work, it wasn't something that lined up or leveraged their existing business to the degree they felt made sense. And so it makes me think a little bit of satellite radio, and you had Sirius Radio and you had XM Radio, and then they merged to form the one big provider in that space. I mean, I ultimately could honestly see this being just like one or two really big providers in the space, but you know, time will tell.

Hill: The Container Store (TCS -3.54%) came out with their fourth-quarter report. Not surprisingly sales down, the stock down 20% today. And I understand it because they're not Wayfair, they're not built on an e-commerce platform, and yet, you know, I sort of shake my head in sympathy among other things, because this is one of those times where people, because they're spending time in their homes, they're looking more closely at their homes and doing the types of things in terms of renovation and improvement that, in theory, should work out really well for the Container Store.

Moser: Yeah, you would figure. I mean, this is the dreaded preannounce, it's always a bit of a coin flip, but I think with the Container Store, it's probably pretty easy to figure out it wasn't going to be that great. And it's understandable, I mean, everybody is kind of in the same boat at this point.

But that said, based on its past performance, I mean, this was a tough one to justify owning, even in the best of times, unfortunately. They've had to close all of their stores; they are utilizing part of that store base for curbside pick-up. And I will say, one glimmer of hope here is that at the beginning of fiscal '20, which started for the company on March 29, they did note that online customer orders have nearly quadrupled the level of the prior year. So that is good. I mean, let's recognize that's the ray of light there. But the numbers are the numbers. And they have pulled guidance. Obviously, comp sales remain challenged.

And I think the bigger question in regard to the Container Store at this point, it's about the balance sheet. I think it's about the liquidity here, because if you look at the income statement, their coverage ratio is around 2 today. And that's how many times you can put interest expense into operating profits, and you want that number to be high. And for the Container Store, it's really low at 2, and it's reasonable to assume it's going to get lower.

The balance sheet, they are in sort of that cash-conservation mode that Shake Shack mentioned recently in their earnings call. They really have to figure out a way to play defense and buy some time, and we're seeing more and more here, along this retail landscape, we're seeing bankruptcies, we're seeing those headlines start to come up. And I'm not saying that the Container Store is headed for bankruptcy, but we can definitely, at least, be having that conversation given what we know today.

And to your point about home renovation projects and this being, kind of, an ideal time, you're right, it is. The problem is that the Container Store, it's always been a little bit of a higher dollar offering. And I think that makes it a bit more challenging for them, particularly when you have other concepts like IKEA out there that focus far more on that value side of the equation and obviously have bigger stores, I think have far more loyal following than something like the Container Store, so.

Difficult stretch for the Container Store. I have a feeling it's going to get more difficult, but we'll have to wait and see.

Hill: You can email us, [email protected] is our email address, you can also hit us up on Twitter @MarketFoolery is our Twitter handle.

We've got a question on Twitter from Jonathan Breslin, who wrote, "Big fan of the podcast, could you comment on the impact of Twilio's deal with Epic [Epic Systems Corp] on Teladoc?"

What is this deal, Jason?

Moser: A good question, and thanks for the question, Jonathan. So Epic is one of the nation's largest electronic health record companies, and Twilio is a tech company that provides programmable video support, among other things. And so, ultimately, Epic, in the middle of this pandemic, has decided that they wanted to build out a telehealth offering, and they're going to use Twilio to support that. Which I think makes a lot of sense. Twilio is a good business, they provide a good service and good products. The numbers show that.

And so, I think, it ultimately is a good thing, I understand why they're doing it at this point in time. Certainly, this has hastened the adoption of telehealth/telemedicine. And I think that you ultimately need to view competition as a good thing. I mean, it ups the ante and it brings progress.

And so, for me, when I see something like this, more or less to me, it validates what companies like Teladoc Health have been doing all along. And I mean, this is a massive, massive market opportunity, right? The U.S. healthcare expenditures as a percentage of GDP is around 18%. I mean, it just gives you a perspective there how much money is involved when it comes to just our domestic healthcare system alone.

And so this reminds me, I think it was Warren Buffett who brought up that "innovators, imitators, and idiots" thing, right, do you recall that, does that sound familiar?

Hill: I don't, but keep talking, I'll look it up.

Moser: I'm pretty sure it's Buffett who said, you've got your innovators, your imitators, and your idiots. So what he's ultimately referring to is you got companies out there that innovate, that start something new and bring progress, then you got imitators that say, "Hey, that looks pretty good, let's do it too." And they get in there and they try to compete as well. And then you've got the idiots who, they're a little bit late in the game and just bring bad, bad products and services. And they don't really see it all the way through.

But I would say, in this case, Teladoc Health, to me, certainly falls in the innovator space here. They've been at this for a long time. Epic, you know, I think that this is probably one of those imitator things, where they see a neat market opportunity and a valuable service that they can provide based on the information that they have through their electronic health records. So that's maybe an imitator thing; I certainly wouldn't call it an idiot thing at this point at least.

To me, you know, I think when you look at this market, it is so large, it's not a market where one provider is just going to be providing it all. I mean, I don't think anyone should look at healthcare as a winner-take-all space. I think that Teladoc is going to be one of the companies that helps spearhead this move toward virtual healthcare and helps scale healthcare, which is I think one of the biggest challenges we've been trying to overcome for a while.

And we've gotten some questions before in regard to, during the pandemic, a lot of video platforms are able to connect doctors with patients, and those platforms might not normally be able to be used in regulatory environments, and that all revolves around HIPAA, the Health Insurance Portability and Accountability Act of 1996. That ultimately focuses on data privacy and security for safeguarding medical information.

And actually, HIPAA has been suspended during the pandemic, and the reason was, because this is essentially an emergency and we want to be able to leverage every tool that we have to be able to connect doctors with patients and care for as many people as we can. So that is something that will phase out, but it's important to note that, because I think the regulatory environment, it can be a barrier for a lot of these companies that are doing this kind of thing today.

Now, I believe that Epic here with Twilio, that would be HIPAA compliant ultimately, based on what Epic does, but I think at the end of the day, again, Teladoc has been at this for a while, and they've built out a very comprehensive offering with a lot of different touchpoints in a lot of different markets, and they've made some acquisitions along the way to build up this very comprehensive network. And I think that gives them a great head start, I think it gives them a great advantage in being one of the innovators in this space, and I don't think you can hold it against Epic at all for wanting to be one of the imitators. I think it's a good thing, and hopefully, it's able to save some lives in the process.

But ultimately, I look at competition as a good thing and I think it spurs progress along. And I think that ultimately, these are the types of things that will make Teladoc and the virtual healthcare market even better years from now.

Hill: Yes, Warren Buffett, you nailed it. What he called the progression of the three I's, first from the innovators, then the imitators, then the idiots. Well done, sir.

Moser: Thank you very much.

Hill: Thanks for helping out today. I appreciate it.

Moser: Always happy to do it, man. Thanks for having me.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.