As the bulls are dominating the market and economy continues its recovery, money starts flowing back in risky assets from safe assets such as CDs and Bonds. As capital flight takes off from safe land to risky land, private sector finally gets the chance to enjoy the same level of attention as public sector did over the past 5 years. We are seeing more and more new stock offerings while the tech sector gets hotter and hotter and players are expecting another strong year in 2014. The largest IPO of the year came two days ago from Candy Crush creator, King, which revealed that it was seeking $500 million through a listing on the New York Stock Exchange (NYSE) and other well-known companies who had IPO or had filled IPO in past 12 months – Twitter (TWTR), Go Pro, Square, A10 and etc.
Technology does make our life easier, doesn’t it? The answer: absolutely yes. Sometimes you are surprised how lazy human beings are. Instead of pulling out your cell phone to dial those numbers and then converse with the restaurant get your order, now you can shorten the process by just a few clicks. “More people are ditching phones and ordering takeout online – and one company plans to profit in a big way from that. “ GrubHub seamless, the result of a merger between two start-up companies from last year, had become the largest US online food ordering provider and just filed for a confidential initial public offering according to the news.
Just like other pre-IPO start-up companies, investors really generally have no clue how much the company will be valued at or how much the company will offer on the market. As far as I know, I see the IPO coming as early as April or May 2 due to higher-than-average market liquidity.
How They Generate Revenue – Business Model
It doesn’t take a lot to understand how restaurants generate their revenue but as a value-adding service provider – how is GrubHub Seamless generating its revenue from helping customers and restaurant owners? To be straight-forward the revenue generation can be summarized as this graph.
I am certainly not trying to oversimplify their revenue generating model and I am sure they have other streams which are consistently generating revenue for them, however, just to be plain and simple in this case- GrubHub and Seamless make money by collecting a small percentage of restaurants’ sales (normally 10% -15% sometimes higher) from the food orders they facilitate and also by offering advertising to restaurants who want to be on the top of the list when a customer search for food that they want. In 2013, at the time when merger happened, GrubHub said, “Its service includes more than 20,000 online ordering restaurants; Seamless says its service has more than 12,000 restaurants. Together, they process more than 90,000 orders a day, the companies say.”3 However, according to the lasted data, the combined company process about 150,000 orders a day and had generated more than 100 million revenues in the year of 2012.
Rising Star or Cash Cow?
Due to limited financial insight of these two companies it is fairly hard to measure the growth for the company, however, there is a way we can estimate it. According to past interviews with company’s top executive Matt Maloney, two important KPIs come out to our sight when we are estimating company’s growth profile – the number of affiliated restaurants and the number daily processed orders.
GrubHub Seamless has 28,000 restaurants across 600 cities that post menus or allow customers to order through the company’s websites. That number was around 22,000 prior the merger from last year and it was about 14,000 combined from a year ago – that gives us a 26% CAGR on the affiliated restaurants. Also the number of order processed daily has increased significantly as well (almost a 67% increase on YoY basis).
In addition to that, “there were 4,442 more restaurants in the U.S. in fall 2012 than there were in fall 2011, according to a recent U.S. restaurant census conducted by The NPD Group, a leading global information company.” The total number of U.S. restaurants is now 616,008 — a .7 percent increase over last year, based on NPD’s fall 2012 ReCount®, which is a count of commercial restaurant locations in the United States compiled in the spring and fall each year.4 Although it was the data from last year, it still indicates a positive momentum on consumers’ spending on food and dinning service.
|Segment||System Type||Fall 2011||Fall 2012||PCYA*|
*Percent Change from a year ago Source: The NPD Group/ReCount®, Fall 2012
As the economy continues to recover, individuals and families are more confident on their future earnings which results a potential higher spending on food and dinning service. To sum up, this industry will be performing well consistently in the next couple years and it won’t suffer too much from major economic turnarounds since people still need to eat on a daily basis.
We can’t predict future but we can look back at history. If we check Facebook (FB), Google (GOOG) and other major tech companies, after they went public they’ve been aggressively purchasing other small-sized tech companies who have favorable growth potentia by either cash or stock. In fact, just 2012 alone, there were 56 deals happened for companies in internet industry. Now the question should be brought up –will Grubub and Seamless continue
They are very likely going to pursue such a strategy either within the industry that they are currently operating in or outside of the industry so they could diversify their business into multiple fields. In that way, they can provide a more diversified revenue base. GrubHub Seamless is already a huge portfolio companies within the food ordering industry -they currently own a group of brands that includes MenuPages (menupages.com and Allmenus (allmenus.com) and the combined coverage is over 600 cities in U.S and London.
If we look at company’s current footprint, the current set up (with offices in Chicago, New York, Salt Lake City and London) clearly indicates company’s ability for future expansion across the world. All the infrastructure and the amount of cash the company is going to receive after an IPO event all confirmed a potential aggressive expansion strategy that the company could implement in the coming years.
Buy or Hold?
All being said, GrubHub Seamless has a very unique and profitable business model and they operate in a growing industry plus their well-prepared and expandable business infrastructure really give them the edge to be compete with some other high PEG stock in tech sector. I personally think it would be a good buy and long-term hold stock if the IPO is not overpriced by the underwriters.
2 US Trading Volume by Month, www.itg.com/trading-volume/month/
4 NPD Recount, www.npd.com
Author: Chuhao(Joe) Zhou
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.