Strong revenue growth
Just Eat Takeaway’s revenue growth has been stellar for years, and the first half of 2020 is no exception. Gross merchandise value grew by 42% YoY in H1 2020, revenue grew by 44% YoY. In Q3 2020, Just Eat Takeaway’s order grew by 46% YoY, showcasing the company is far from experiencing market saturation. However, losses widened during the period from €41 million in H1 2019 to €158 million in H1 2020.
Fortunately, Just Eat Takeaway’s underlying business continues to grow its profitability since €142 million in advisory fees for both the Grubhub (NYSE:GRUB) and Just Eat takeover were to blame for the huge loss. Just Eat Takeaway uses a metric called adjusted EBITDA to showcase that its underlying business is profitable, for H1 2020, the adjusted EBITDA totaled €177 million.
Their adjusted EBITDA is equivalent to EBITDALSN, earnings before depreciation, amortisation, finance income and expenses, long-term employee incentive costs, the share of loss of joint ventures, and non-recurring items. Share of loss of joint ventures was €31 million in H1 2020, non-recurring items were €152 million, and, last but not least, long-term employee incentive costs were €18 million. That puts the ‘real’ EBITDA for H1 2020 at a minus €109 million.
The non-recurring items were mainly acquisition-related costs, and it is obvious that this is not reflective of the long-term business prospects. This is why I deem it fair to adjust the EBITDA for acquisition-related costs, this puts my adjusted EBITDA at approximately 20 million. Clearly, Just Eat Takeaway is a business starting to become profitable.
While Just Eat Takeaway is a business becoming profitable, it is buying a business that is struggling to remain relevant.
It is quite clear that any successful food delivery company needs to have a number one position in the region it operates. This is why Jitse Groen, CEO of Takeaway.com said: ‘we have a very simple strategy of being the number one’. ‘Why? It is food! These people are hungry, they are coming back, and they are not gonna go to a competitor, these people are hungry, they want their food in 30 minutes, they are not going to take a gamble that their food doesn’t arrive because they happen to try a different service’ he concludes: ‘people are very sticky’.
Yes, people are very sticky, which is why I remain worried about Grubhub. Sales for August 2020 imply that Grubhub continues to lose market share as competitors are expanding across the board. In 2018, Grubhub had a 50% market share, now it is a meagre 21%.
A couple of months ago, Uber (NYSE:UBER) announced it has acquired Postmates, which is why I consider Uber Eats and Postmates to be one competitor. It is clear when looking at the market share split by cities, that Grubhub is not even the second player in a majority of the regions. Actually, Grubhub is only the market leader in New York City and Boston.
In most other markets, Grubhub is a distinct third player. Why is that problematic? Here is Jitse Groen to explain that:
Usually the number two can not overtake you, which is great if you are the number one, if you are the number two it is not so great.’ ~Jitse Groen
I suspect in a couple of years Grubhub will halt its operations in some regions, instead, it will try to concentrate on a couple of lucrative regions – especially the northeastern region of the United States. Currently, management is trying to grow its presence in the entire US, while it is clear that in some areas Grubhub is fighting an uphill battle. I am worried management will waste capital before realizing that the battle is already lost. An analyst asked Jitse Groen during a conference call whether he would consider concentrating on some lucrative regions instead of the entire United States, but he rejected that proposal and explained instead:
A food delivery company that is going to make any protention to be the US market leader, needs to be the market leader in New York City. It as simple as that.’ ~Jitse Groen
I beg to differ. It is clear that every city in the United States is equivalent to a nation in Europe, it is a different region where different marketplaces can be market leaders. Data is clearly implying that it is possible to be a market leader in most cities, but not the market leader in New York City: DoorDash (DOORD) is showcasing that right now. However, if you do not deem my opinion as worthy, here is Matt Maloney, Grubhub CEO, during the same conference call explaining why:
In the United States we talk about cities as markets, whereas in Europe we talk about countries. For example, our Boston business has no impact on our New York business. Even do they are relatively close. With very different communities, very different order patterns, very different restaurants.’ ~ Matt Maloney
There is no denying that Grubhub’s New York City marketplace is wonderful and is creating substantial shareholder value, but Grubhub’s leading position in New York City does not affect its market position in other cities.
Just Eat Takeaway has €525 million in cash and cash equivalents in H1 2020. The company has no long-term debt, the current market capitalization of the company is €14.11 billion. Consequently, its enterprise value is €13,585 million. Earlier, we discussed Just Eat Takeaway’s EBITDA when neglecting non-recurring items, the company’s adjusted EBITDA will amount to approximately €150 million in 2020. Consequently, I suspect its forward EV/EBITDA ratio to be 90. The company generated €1,031 million of revenue in H1 2020, it is logical to assume revenue for 2020 will be approximately €2.3 billion. So, the company is currently selling at approximately a forward EV/sales ratio of ~6. This is shockingly cheap for a company with YoY revenue growth rates of 30-50% driven by networking effects.
But, I assume the Grubhub takeover will dilute shareholder value. Just Eat Takeaway is buying Grubhub at a forward EV to sales ratio of ~4, while its own forward EV to sales ratio is ~6. I believe the company is valued rather cheap compared to Grubhub, which is great for Grubhub shareholders but not Just Eat Takeaway shareholders. The problem is that a wonderful company is buying a mediocre company and that dilutes shareholder value.
One reason why the market might be valuing Just Eat Takeaway rather cheaply is due to the company’s business model undergoing a huge shift. With competitors like Deliveroo and Uber Eats entering the market, Just Eat Takeaway is undergoing intensified competition. Since these competitors are delivering food with their own drivers, Just Eat Takeaway needs to do the same to avoid becoming a second Grubhub.
Just Eat Takeaway has been relatively reluctant at expanding its delivery network. In the call, Jitse Groen explained: ‘Compared to a marketplace, the EBITDA margin of logistics is lower.’, Grubhub CFO elaborates why:
We’re generating just as much contribution profit on independent and small chain orders that we deliver as we are on small chain independent restaurants that deliver for themselves. ~ Adam DeWitt – President and Chief Financial Officer Grubhub
So, in short, building your own logistics network does not increase profits while the invested capital does grow substantially. This is why the return on invested capital goes down. This is problematic, and probably the reason why Grubhub management did not start hiring their own drivers until 2018.
I note that the current valuation actually provides a healthy margin of safety and that Just Eat Takeaway is building a strong moat. Networking effects are driving huge organic growth in all regions, and I deem it as challenging for other competitors to outgrow Just Eat Takeaway over the long run.
Takeaway (pun intended)
Just Eat Takeaway’s valuation is relatively cheap; considering its growth prospects, it has a healthy balance sheet, and the company is ready to turn profitable. Just Eat Takeaway’s core business is strong: network effects are helping it grow its customer base in most European countries. The company is set for huge organic growth in the next decade, while its stock is priced at a reasonable valuation.
But I note that the Grubhub takeover is risky and can turn out be too expensive. Management does not seem to realize how weak Grubhub’s market position in most American cities actually is. With this takeover, Just Eat Takeaway might dilute its existing shareholder value.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TKAYF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.