European-based Just Eat Takeaway.com (JTKWY -1.24%) continues to struggle after its acquisition of American food delivery company Grubhub. Activist investors are urging Just Eat to spin off Grubhub, but CEO Jitse Groen refuses, drawing a negative response from the stock market. Meanwhile, delivery company DoorDash (DASH -1.80%) is a thriving investor favorite as it follows a different strategy, yet its bottom line results are little better.
Just Eat, food delivery, and Grubhub woes
Just Eat Takeaway is Europe's biggest food delivery conglomerate, with a 70% market share, according to Jitse Groen. It also established a strong foothold in the U.S. food delivery market with its June 2021 integration of Grubhub, after it began the acquisition for over $7 billion in stock in the year prior.
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At its Capital Markets Day presentation in late October, Just Eat stated that while the orders it's delivering through its various subsidiaries are growing at a breakneck pace, it's still generating net losses. Its net loss for the first half of 2021 amounted to approximately $544.8 million, compared to a $177.1 million net loss for 2020's first half, despite a 52% revenue gain year over year for the period.
In response, Cat Rock Capital, an activist investor with a 6.5% stake in Just Eat, strongly urged the delivery company to sell or otherwise spin off Grubhub. The investment firm acknowledged Grubhub is actually a strong performer but noted the market believes the new subsidiary is a negative for Just Eat, regardless of objective data. Dropping Grubhub, it argued, would free the parent company from negative investor sentiment, opening the door to higher share prices, better financing opportunities, and future expansion.
Groen responded on a Nov. 17 Morgan Stanley conference call with a point-blank refusal to sell Grubhub. Reuters reports Groen said his company is looking at partnerships with big American grocery chains, or logistics businesses.
He added that he thinks Just Eat will soon be "very big in grocery." The stock market temporarily bid down the share price by more than 2% in response. Notably, no delivery plans for items unrelated to food or groceries were mentioned in Groen's Grubhub strategy.
A look at DoorDash's business model
Turning to one of Just Eat's bigger competitors, DoorDash, reveals a delivery company enjoying considerably more stock market success than Just Eat. Its stock is up 70% during the first nine months of the year, while Just Eat's shares are down roughly 81% over the same period.
DoorDash grew its revenue by 45% in the third quarter, not exactly the same but in the same ballpark as Just Eat's 52% revenue increase in the second quarter. Given that delivery services are highly interchangeable and research has repeatedly shown little customer loyalty, it is probably not surprising their outcomes are similar, since they are profiting from the same demand trends in the same market.
A standout difference between DoorDash's business model and Just Eat's is that while DoorDash is strongly involved in food delivery, it's also branching out into retail delivery. For example, it inked a deal with Ulta Beauty on Nov. 2 to provide same-day delivery for Ulta's beauty products, initially in six major American cities with many more planned for 2022. The company provides similar fast local delivery for liquor stores, Bed Bath & Beyond, and a growing assortment of other retailers.
Last-mile delivery of goods other than food should theoretically give DoorDash an edge in profitability, with a vastly broader range of possible partners. It also bypasses the fee caps mandated specifically on food delivery in some major metropolitan markets like San Francisco and New York City. The limits on delivery fees generally only apply to food, not to housewares or makeup.
Yet DoorDash's different strategy really hasn't produced a significant bottom-line difference. While its third-quarter revenue grew strongly year over year, its net loss exploded at an even faster pace, increasing 110% from the $149 million net loss in the third quarter of 2020 to a $313 million net loss in the third quarter of 2021. Its net loss per share dropped from $3.34 in the third quarter of 2020 to $0.94 this year, but this resulted from massive share dilution, with the outstanding share count rising from approximately 44.6 million shares a year ago to 334.3 million today.
Topping off the picture, its adjusted EBITDA margin is actually falling, dropping from 10% in 2020 to 7% in 2021, "as a result of investments in international markets, expansion into new verticals, and increased sales and marketing expenses stemming from increased Dasher acquisition costs," according to a Securities and Exchange Commission filing.
In short, despite its very different stock market reception (bullish versus bearish) from Just Eat, DoorDash is operating in almost precisely the same way. Its revenue is ballooning as demand for food delivery continues to skyrocket, yet it cannot turn this into profits. Its margins are actually decreasing, with the company becoming less efficient and experiencing proportionately greater expenses as its top-line success grows. As with Just Eat, its net losses appear to be getting bigger even as it tries to shrink them through aggressive expansion of its delivery services.
Is Just Eat or DoorDash a better delivery market investment?
Right now, DoorDash appears to be the better choice for investment if picking between these two food delivery stocks. Wall Street likes DoorDash much better than Just Eat in the short term, but over the long term, it's far more difficult to identify a winner.
Cat Rock Capital appears to be correct that Grubhub is not actually performing worse than any other delivery subsidiary, meaning irrationally negative sentiment about it will eventually be priced out of Just Eat's share value. Conversely, DoorDash is still generating net losses, which are increasing year over year even with its strategy of branching out into same-day delivery outside the restaurant and grocery space, and the company could see its stock's bull run end as the market recognizes this fact.
Neither company has managed to break out of the persistent food-delivery pattern that increasing revenue simply leads to continuing and even growing losses because of the mounting expenses of physical delivery.
Perhaps the delivery companies will eventually solve the problem, but it's impossible at this stage to guess which will achieve a profit first. DoorDash looks like the better short-term investment, but for long-term holding, the entire delivery marketplace's fate is unknown. The outlook therefore appears neutral for both Just Eat Takeaway and DoorDash in the longer time frame, with great caution advisable when it comes to buying into either one.
