I’m betting this FTSE 100 tech stock will dominate a £300bn industry

This FTSE 100 (INDEXFTSE: UKX) stock has a powerful position in its sector and industry trends make me think it’s set for more growth in the future.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A decade ago, ordering a takeaway involved picking up the phone, speaking to the guy at the local pizza shop and waiting longer-than-expected to get it delivered. Now, with the proliferation of smartphones, improvements in location tracking technology, and heavy investments in last-mile logistics networks, delivery apps have redefined the food delivery experience. 

It’s an industry that’s been rapidly expanding across the globe and is already worth over $13bn today, according to food industry strategy firm Pentallect. However, Swiss investment bank UBS’s research arm, the Evidence Lab, believes this is only the beginning. It estimates an industry value of $365bn (£303bn) by 2030. 

It singled out British tech giant Just Eat (LSE:JE) as a key beneficiary of this trend. I agree with this assessment and expect JustEat to see long-term success, despite the industry’s many challenges.

Consumer behaviour

A few years ago, research from McKinsey & Co found that delivery apps like Just Eat had a phenomenal record of retaining the customers they managed to sign up. Over 80% of delivery app users rarely or never left the first platform they picked. 

And the amount of food being ordered on these platforms has been rapidly expanding. Just Eat’s 27m customers place an order 8.7 times a year on average, it said in its latest results, so most customers are using the app about roughly every six weeks. 

The stickiness of its app gives Just Eat leverage over its suppliers, which includes both restaurants and delivery drivers. This is a competitive advantage in an increasingly crowded market. 

Winner-take-all

Although Just Eat pioneered the online food delivery business model, it’s now far from the only player in this market. Tech giants like Amazon and Uber have more recently tossed their hats into the ring. And given Just eat’s international exposure, it is worth noting that local start-ups around the world, like Swiggy and Foodora, are expanding at a fast rate too. 

UBS’s research counted 350 food delivery apps globally. However, it believes this crowded state of the market is temporary. The industry has razor-thin margins, which means economies of scale and superior logistics networks will eventually win out. 

It turns out creating a network of thousands of drivers, winning millions of customers, signing exclusive deals with major food chains, and developing a sophisticated mobile platform isn’t easy. 

Not only does Just Eat have a head start on the competition, but when its proposed merger with Dutch peer Takeaway.com is completed, the combined entity will be the largest global food delivery conglomerate. 

That combined entity is expected to be worth £10bn. I believe that’s a fair price, based on the assumption that the global market will expand to £300bn, as well as on the view that Just Eat will capture a significant chunk of it, and that customer retention rates should be sustained over the long term. 

Foolish takeaway

The food delivery industry has been transformed beyond recognition over the past decade. However, the sector is still relatively new and has plenty of room to grow globally. 

The stickiness of these apps and the economies of scale required to make the business model viable indicate that the sector should consolidate around a handful of mega-brands. I’m willing to bet Just Eat, with its head start over rivals and planned merger, could be among the winners. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. VisheshR has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Uber Technologies. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s how investing £250 a month could bag me over £10K in passive income annually

This Fool breaks down how she would go about building a passive income stream worth over £10,000 annually to enjoy…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

I’d snap this FTSE 250 stock up in a heartbeat for juicy returns and growth!

Sumayya Mansoor explains why this FTSE 250 property stock is firmly on her radar as she looks to buy stocks…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

1 dirt-cheap FTSE 100 stock investors should consider buying in June

The FTSE 100 is littered with bargains, according to our writer. She explains why investors should be taking a closer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

The Legal & General share price has gone nowhere. Why?

The Legal & General share price has performed much worse than the the FTSE 100 over the past five years.…

Read more »

Investing Articles

Where will the BT share price go in the next 12 months? Here’s what the experts say

The BT share price has been sliding for years. But after the latest set of results, it looks like the…

Read more »

Investing Articles

Are National Grid shares now a brilliant bargain?

National Grid shares look exceptionally cheap following last week's selloff. Is now the time to buy the FTSE 100 firm…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Up more than 15%! — this small-cap company is delivering phenomenal dividend growth

There’s more good news in this company’s interim report and it may be shaping up as a decent dividend growth…

Read more »

Electric cars charging at a charging station
Investing Articles

Big news for Tesla stock investors!

Tesla has just quietly dropped a key target it set for itself just a few years ago. What does this…

Read more »