We Made 41.2% In 9 Months -- Let's Do It Again
By Genia Turanova | June 26, 2019 |

Investors know that markets react quickly to any new development or big news. But markets also tend to overreact. 

The latter explains why, while being "efficient" -- that is, reflecting all the available information -- the market also contains a wealth of overvalued as well as attractively valued stocks at any given time. This is what stock picking is all about -- finding companies that look undervalued by the market.

Of course, stock pickers often have to contend with the phenomenon of market overreaction. In this case, they can be "early on the stock" -- the best of us have been there, having selected a company for its growth potential only to see the stock stagnate or, worse, decline. 

But the potential of choosing the right stock and betting against the grain can also be huge: when all the bad news is already incorporated into shares, an upside catalyst related to any improvement, changes in the company's results or in the market's sentiment could be significant.

I believe that to be the case with Grubhub (Nasdaq: GRUB), a food delivery leader that has served up accelerating organic growth -- and whose shares still don't reflect that positive action. 

GRUB logoIf it seems like I've written about GRUB before, then you have a good memory. I held it in the Game-Changing Stocks portfolio for nine months before selling in August 2017. My readers and I made 41.2%, or 54.9% annualized, nearly triple the S&P's return during the same period.

And while that's a fantastic gain in such a short period of time, we sold too soon... the stock was at $54 when we sold, and would proceed to run all the way up to $144. That was a clear case of market upside overreaction, though, because its share price has now come down to earth (around $71) to present a compelling investment case.

We're Buying This Stock (Again)
Founded in 1999, Grubhub has been ahead of the crowd in discovering food delivery as a separate -- and profitable -- business. Over the past 20 years, the company built an entire portfolio of brands, including Grubhub, Seamless, LevelUp, Tapingo, AllMenus and MenuPages. With both online and mobile ordering platforms, Grubhub makes it possible to order from more than 115,000 takeout restaurants in over 2,200 U.S. cities and London.

Grubhub's business model is relatively simple: it charges a restaurant a commission that can be as high as 30% of the order amount -- plus, consumers pay a service (delivery) charge of about $2 per order. 

Most of the restaurants Grubhub connects to via its platform can choose their level of commission rate, at or above the minimum rate. This will also impact how high -- or low -- these restaurants are on the GRUB's sorting algorithms. Restaurants that pay higher commission rates generally appear higher in the search order than restaurants that pay lower commission rates. 

This business model depends on getting both customers and takeout restaurants on the platform -- and it also relies on efficient technology to make the process fast and seamless, and on having enough delivery-divers available at any time, with the largest number needed at peak times.

Profitability and growth depend on the number of diners who order with Grubhub. Here, the company has made significant progress over the past few years -- not only did it build a recognizable brand name (so that hungry diners know where to turn).

While it might seem easy, Grubhub's business is anything but. It requires a significant technological investment and strong algorithms, from sorting the member restaurants based on the commission levels they choose to making sure the number of drivers is just right for any given time. Moreover, with the restaurant business being what it is -- highly fragmented, with many owner-operated independent restaurants -- GRUB, in essence, advertises for many of them. And because GRUB does not charge the restaurants in its network any upfront or subscription fees, its entire business depends on the number and the size of the orders.

Behind The Numbers
The first-quarter results reported on April 25 demonstrated, once again, the strength of the company's business model, as organic order growth accelerated for the sixth consecutive quarter. The company added 1.6 million active diners in the three months -- and finished the quarter with 19.3 million active diners, up 28% from a year earlier. Better yet, many seem to be long-term customers -- the company has seen repeat rates for these new diners just as high, if not higher than the number of diners it had acquired a year ago.

So with all these positives, why is the stock trading 40% lower than a year ago (shares have declined more than 7% this year alone)?

The answer is simple: competition. As profitable as food delivery can be, the number of companies throwing their hats in the ring has been growing.

Among GRUB's competitors are Uber (NYSE: UBER), the ride-sharing company that has been moving aggressively into the food space, Deliveroo, a UK-based company that has been the recipient of a $575 million Amazon (Nasdaq: AMZN) investment, plus U.S.-based Postmates and DoorDash.

Still, Grubhub, which admittedly has to spend more than ever before on marketing, remains quite profitable -- and growing -- despite also investing in delivery and in new technologies. This year, it's expected to earn $1.44 in per-share profits (compared with 2018's $0.85 per share).

Moreover, I believe the recent increase in spending on advertising and delivery will continue to pay off over the long term. And thanks to its early start, GRUB has built a strong brand name in a growing and massive market for food delivery. How big is the overall market? Here's just one point of data: in its first-ever earnings call as a public company held just a few days ago, on May 30, Uber said that the food category can be even larger than the rides category (where Uber primarily operates). 

Action to Take 
For the food-delivery business, it's still the early days -- with the associated fast growth and accelerating competition. This is a young industry that game-changing investors cannot afford to ignore -- and GRUB, an early entrant and the current leader -- is my pick to play this emerging trend.

My Game-Changing Stocks readers and I added the stock to our portfolio earlier this month, and we're already up by about 10% -- largely on the news that Amazon is ending its restaurant-delivery business. 
Clearly, this development means a less severe competitive environment for GRUB. But it's also good news because AMZN, which gave up building its own business, might be looking to buy an entire ready-to-go company -- such as GRUB -- should it decide to return into this profitable space.

(This article orifinally appeared on StreetAuthority.com.)

P.S.

P.S. If you're looking for even more growth stock ideas, then I invite you to check out my eye-opening report on four major breakthroughs about to take place in the next few months -- and the four stocks behind them that could throw off triple-digit gains. To learn more, go here right now...

 

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