After watching the financial news yesterday, I just realized Beyond Meat and Grubhub have a lot in common. Both are in the food industry, both are in burgeoning markets, both had “first to market” head starts over the competition and both companies saw their stock price rise like a Tesla rocket and…well read the rest of the post.
Convenience, accessibility and just pure laziness are major factors driving the global online on-demand food delivery services market.
GrubHub was at once upon a time the world's leading online and mobile food ordering company. Despite competition from the likes of Uber, DoorDash, Postmates, Square and Amazon, GrubHub controlled 50% of the U.S. food delivery market just under two years ago.
The way the business model works is restaurants do not have to pay anything up-front or any subscription fees, just a commission fee for every order the platform generates.
However, the valuation was crazy. Grubhub was a first to market mover and shares of Grubhub returned 5X from 2016 to 2018 and in 2018 even went as high as $140. The valuation got out of hand. At one point, the P/E was over 80.
But then the competition started coming and their market share went from 50% to 34%, quick fast. So order to stay ahead of the competition, Grubhub grew in other cities, which meant increasing their customer acquisition cost, which meant lower margins. While that was happening, many of Grubhub’s critical metrics like initial diner spend and peak diner spend were all decreasing because customers were using the services of the competition as well. Wall Street started to smell the blood.
Jim Chanos is an American investment manager and currently serves as president and founder of Kynikos Associates, a New York City registered investment advisor who is focused on short selling said Grubhub was a short just last month.
“Right now, GrubHub is making almost no money per order -- it’s something like 15 cents,” Chanos said. “There’s just no margin in this business.”
“We believe that this pressure is occurring at both ends of the spectrum for the delivery companies,” Chanos said. “Not only are we seeing pressure on the labor side with the California law, we believe that the labor arbitrage -- calling these guys contractors -- works in insidious ways.
Chanos said that the company can’t afford to be as aggressive as Uber, which has its own food delivery service Uber Eats, because it doesn’t have the “financial wherewithal.” Competing with Uber, Chanos said, is like being “locked in a cage with a psychopath with an ax.”
And while there’s competition, Chanos said growth in the restaurant business itself has been stagnant.
“The restaurant business is a tough business,” he said. “Even if this all works, and all four of these delivery companies grow to 20 or 25% of all meals, you are growing into a no growth business.”
Yesterday, GrubHub short-sellers made $504 million when shares of the company fell 42% after announcing their third-quarter earnings according to data from financial-analytics provider S3 Partners.
GrubHub received five downgrades, including double downgrades from both Bank of America Merrill Lynch and Oppenheimer following its disappointing third-quarter results.
The food delivery company missed on revenue and posted a fourth-quarter forecast well below Wall Street’s expectations and received five downgrades, including double downgrades from both Bank of America Merrill Lynch and Oppenheimer.
I don't know where the bottom is, although there is some demand on a smaller timeframe at $30. However, this is a no touch stock in my opinion.
Beyond Meat priced its initial public offering at $25 and now the stock is up more than 200% in less than a week. Beyond Meat, a maker of plant-based meat products is the new IT THING on Wall Street and sold at a supermarket and restaurant near you.
Beyond Meat is also trailblazing a new secular movement away from animal protein.
So yes, although plant-based meats in the U.S. rose 23% last year, it still represents only 1% of the total meat sales in the US. So yes, because Beyond Meat controlling about 10% of the plant based meat market in 2018, what you have is FOMO in the stock price.
But Beyond Meat is beyond over-valued. For example, with $80 million in sales last year, you get a sales to price ratio of 44 vs. Hormel Foods and Conagra with a sales to price ratio of 2.3 and 1.6, respectively.
Beyond Meat priced its initial public offering at $25 and skyrocket 800% in less than four months. Beyond Meat, a maker of plant-based meat controls about 10% of the plant based meat market. And because they have achieved “first to market” status, they are the new IT THING on Wall Street.
Beyond Meat is also trailblazing a new secular movement away from animal protein. Although plant-based meats in the U.S. rose 23% last year, it still represents only 1% of the total meat sales in the US, with Beyond Meat controlling about 10% of the plant based meat market in 2018.
But there valuation is beyond ridiculous. Their valuation was at one point higher than roughly 25% of the companies in the S&P 500 index. For example, with $80 million in sales last year, you get a sales to price ratio of 44 vs. Hormel Foods and Conagra with a sales to price ratio of 2.3 and 1.6, respectively.
But now the competition is coming.
Kellogg (K) introduced “Incogmeato,” which is a plant-based meat alternative made from non-GMO soy. Kellogg’s plant-based burger patties, Chik’n tenders, and Chik’n nuggets which go on sale in early 2020.
Kroger said they will sell a new line of branded plant-based burgers, other meatless products like dips, pasta sauces and cookie dough in the coming months under their Simple Truth Plant Based label.
Hormel Foods once a piece of the action too and announced its plant-based meat substitute called “Happy Little Plants” is available at select retailers.
Then there is Impossible Foods which launched the Impossible Burger through Burger King in August and now have product along Beyond Burger on the shelves in supermarkets.
Yesterday, Beyond Meat announced third quarter earnings.
Beyond Meat, which has a market value of about $6.4 billion, on Monday topped analysts’ expectations for its fiscal third-quarter earnings and revenue. The company reported earnings of 6 cents on revenue of $92 million, while analysts forecast earnings of 3 cents on revenue of $82.2 million, according to Refinitiv. Beyond Meat saw sales grow across both its grocery and restaurant divisions, as its meatless products drew in more customers and kept existing customers coming back.
“Despite solid results the likelihood of early stage investors cashing out on a stock which is still up about 4x since its IPO, remains a drag in coming trading sessions,” said Barclays analyst Benjamin Theurer in a note to clients Tuesday.
Tuesday is the first time since the IPO that insiders can sell the stock, which could cause short-term pressure, analysts said. Roughly 75% to 80% of the outstanding stock is available to trade after the lockup expiration.
So is the weekly demand at $81 the time to get in, the chart suggests so, but I think this stock is a no touch as well.
As you can see, Grubhub and Beyond Meat are almost like twins. The question now becomes can both companies remain twins in the form of a comeback story?
This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.