Have you ever booked a restaurant reservation online? If so, you most likely went through a website or program offered by OpenTable, a company that was founded in the middle of the dot-com craze in 1998 to make that chore easier.[ad#Google Adsense 336×280-IA]Unlike many other internet companies of that time, OpenTable survived and prospered. It went public in 2009, but was snatched up by Priceline Group (Nasdaq: PCLN) in July 2014.
Though it might seem like a strange pairing, the acquisition made sense: Both OpenTable and Priceline are consolidators (in their own specific ways, of course), and OpenTable has managed to find an industry where it could connect end consumers with hundreds and thousands of diverse markets (in its case, independent restaurants).
As it turns out, the restaurant industry offers even more chances for innovative companies to come in and put their own stamp on the way restaurants do business. And investors who get in early on the trend could end up doing very well.
That’s why I recently added GrubHub (Nasdaq: GRUB) to the portfolio of my premium newsletter, Game-Changing Stocks.
For those who are unfamiliar, GrubHub targets primarily independent restaurants, but in a different way. GrubHub’s business offers consumers an online app for ordering takeout. It presents a range of choices and offers ease of selection. The process is smooth and seamless, all the way down to delivery.
The modern restaurant business, especially the takeout segment, remains highly fragmented and is therefore poised to benefit greatly from technology.
Based on a Euromonitor study, Americans spent $221 billion at independent restaurants in 2013, with an estimated $70 billion of that spent on takeout. Using Euromonitor’s forecasts, GrubHub believes total takeout spending (including independent restaurants and larger chains) hit $200 billion last year. That’s a large and growing market, especially as advances in technology continue to make takeout ordering simpler.
This means there is room for GrubHub, one of the industry pioneers, to keep growing. A relatively young company that only went public in 2014, GrubHub makes its money by charging restaurants a per-order commission that is primarily percentage-based. In some markets, GrubHub also provides delivery services to restaurants on its platform. Restaurants that use the company’s delivery services pay an additional commission on the transaction for the use of those services.
In 2015, GrubHub sent $2.4 billion in gross food sales to local takeout restaurants, and that metric is up 27% through three quarters of 2016, putting GrubHub in range of $3 billion in gross food sales this year. As a result, Grubhub’s annual revenue is expected to jump 36% to $492 million this year and another 25% to $616 million in fiscal 2017.
Those revenue increases should drive earnings higher, too. Analysts expect last year’s adjusted earnings of $0.68 per share to rise 32% to $0.90 this year, before jumping another 26% next year.
As fast as this growth is, however, it still only scratches the surface of what’s possible.
GrubHub, in fact, has already become the leading online and mobile food-ordering company in the U.S., and it gives consumers the option to order directly from more than 45,000 restaurants in over 1,100 U.S. cities and London. The company formed from the 2013 merger of GrubHub and Seamless, a competing service, and now has such brands as GrubHub, Seamless, MenuPages, Allmenus and more in its portfolio.
Fast food as well as takeout food is an ultimate on-the-go business, and it also seems that takeout ordering is a perfect fit for mobile. GrubHub recognized this potential early on, and the value of the GrubHub mobile platform has been growing ever since. Orders placed on mobile devices increased from approximately 39% of consumer orders during the first quarter of 2013 to roughly 60% today.
GrubHub also provides diners with information and transparency about their orders and solves problems that may arise. Moreover, re-ordering is easy and convenient because GrubHub stores previous orders, preferences and payment information.
In the three months ended September 30, overall sales jumped 44% compared with a year earlier. Investors were concerned, however, when they saw that “active diners” (the number of consumers) had only grown 19%. But taken together, these two numbers indicate good trends: New and existing customers increasingly turn to GrubHub to order food.
GrubHub’s platform is beneficial to restaurants, too. The company offers an order management system that helps process orders quickly and accurately. Restaurant staff can also keep tabs on the status of delivery.
Make no mistake: GrubHub is a tech company, and its success has been a function of its technology.
Its ordering system is smooth and easy to use. Mobile, as we just discussed, has been a growth driver, and the company’s restaurant management system is also available on iPads.
Further, GrubHub employs a sorting algorithm that helps it better monetize its restaurant relationships. Most of the restaurants on its platform can choose their level of commission rate, at or above the minimum rate, to affect their relative priority in the company’s sorting algorithms. Restaurants paying higher commission rates generally appear higher in the search order than restaurants paying lower commission rates.
— Genia Turanova
Sponsored Link: GrubHub is an exciting tech company in the food business, and its future is largely determined by how well it executes its growth plan and fends off competition. This is exactly what my Game-Changing Stocks subscribers and I want from a young, game-changing growth company.
GrubHub looks like a strong long-term investment here, but it’s just one of many stocks I hold in my portfolio. To get the names and ticker symbols of all my current picks, as well as access my latest research, go here.
Source: Street Authority