In a report published Wednesday, Citigroup analyst Christopher J McVey pitted JUST EAT PLC JSTLF against GrubHub Inc GRUB in a head-to-head battle of two giants in the Online Food Ordering (OFO) sector.
According to McVey, the OFO sector is one of the "most dynamic" in the Internet industry. Investors are attracted to the size of the opportunity, the "winner-take-most" profile, the "catalytic impact" of the rapid adoption of smartphones and mobile payments and the higher return on invested capital (ROIC) characteristic of their business models.
United Kingdom-based Just Eat and U.S.-based GrubHub are the two largest publicly-traded pure play global peers. According to the analysis, each stock is a Buy for slightly different reasons.
Here are a few of the categories McVey used to evaluate the two companies in a head to head battle.
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Marketplace Growth Opportunity
Just Eat has a leading market share in its home market, as does GrubHub in U.S. market. However, given the "relatively nascent" delivery market share for GrubHub in the U.S. versus Just Eat in the UK, as well as the substantially larger target market, GrubHub is positioned with a "substantially longer trajectory" for growth should it be able to capitalize on its current market-leading position.
Market Penetration And Share
McVey estimated Just Eat will command a "healthy" 30 percent of the total UK delivery market by 2017. This compares to GrubHub with around 5 percent of the U.S. market.
Just Eat's larger market share leaves it in a better market position than GrubHub as its market share is better insulated and protected from new entrants in the market.
Winner: Just Eat.
Both companies are very well positioned and maintain a "significant" lead over their next-closest competitor.
McVey's research suggested Just Eat enjoys an 81.4 percent share of monthly visits for their sites, with Hungry House a distant second at 17.2 percent. Likewise, GrubHub enjoys a 79.4 percent share of monthly traffic, with Eat24 (recently acquired by Yelp Inc YELP) is a distant second with an 11.5 percent share.
Both companies operate in distinct market, but Just Eat holds an edge on GrubHub in terms of Active Diners (8.1 million versus GrubHub's 5.0 million at the end of 2014). On the other hand, GrubHub captures a greater revenue per order due to its higher commission rate.
Just Eat operates a largely fixed percentage commission model across its markets while GrubHub operates an "auction sort" model that allows restaurants to increase their commission rate to rank higher in search results.
GrubHub's different model allows for a greater monetization in ultra competitive markets, which also happens to be its largest contributors to Gross Food sales. As such, GrubHub has a better opportunity to charge "materially" higher fees than Just Eat.
Margin Analysis & Upside Potential
Both compares are still in a high-growth stage and are still working on improving margins.
According to the analyst, Just Eat's EBITDA margin figure in scale markets such as the UK could reach around 65 percent under a mature market as soon as 2018.
On the other hand, GrubHub could achieve EBITDA margins of around 50 percent only in 2025 under an "upside case" with 44.1 percent margins in 2025 under a "base case."
Winner: Just Eat.
Both companies are "well positioned" within "structurally growing" markets. In addition, shares of both companies have seen recent pullbacks.
On a P/E basis, Just Eat offers a better value, however GrubHub also has an attractive valuation with shares trading at 20.8x EV/EBITDA versus its peers at 19x while growing revenue at around 30 percent versus the 17 percent average estimated in 2016.
Shares of GrubHub are Buy rated with a $48 price target.
Shares of (London traded) Just Eat are Buy rated with a £5.50 (approximately $8.63) price target.
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