Few stocks have performed as well as that of online food delivery marketplace Just Eat (LSE: JE) in recent years as throngs of lazy food-lovers (myself included) have flocked to the site to find quickly delivered meals. But while the company’s growing profitability has brought its valuation down to only 55 times forward earnings, there’s a great deal of growth already baked into its share price. So is Just Eat still a top buy for growth-hungry investors?
Unlike competitors that actually deliver the food customers order, Just Eat is highly profitable thanks to skipping that costly task and simply acting as a marketplace for restaurants to post their menus and process orders. For this, it takes a hefty 14% commission, which is unsurprisingly highly and increasingly profitable as it adds new restaurants and moves into new countries.
In the half year to June, the company’s operating profits rose 47% year-on-year (y/y) to £50.4m from revenue of £246.6m that was up 38% up in constant currency terms. This makes it clear why this business model is highly attractive and leads to high valuations for similar marketplaces such as Rightmove and Auto Trader.
The benefits of high margins and positive cash flow are legion, but one of the major ones is that it allows Just Eat to have minimal to no debt and largely self-fund its rapid expansion into new markets. This includes the mooted £240m acquisition of UK-focused Hungry House that will be funded by cash reserves and new debt should regulators approve the deal.
Unfortunately, Just Eat is far from the only company that’s targeting the rapidly growing market for food delivery. And although Just Eat’s customer base of largely independent restaurants has traditionally been different from that of more upmarket delivery networks, my local curry house also processes orders from Deliveroo and UberEats. This is a phenomenon that is spreading across the UK as well with both of the aforementioned competitors branching out into myriad smaller cities.
This is true in foreign markets as well, as the likes of deep-pocketed Delivery Hero and Uber already have operations in dozens of countries that compete for the same restaurants and customers. Of course, there are first mover advantages that Just Eat can benefit from. However, with investors still keen to invest hundreds of millions of pounds in competitors, Deliveroo, for example, just raised another $385m in September, they will be able to operate at a loss to gain market share by offering restaurants better deals and drive down pricing for the entire sector.
It’s far from clear how this situation will shake out. Just Eat could be fine as it’s one of the few players in the sector making significant profits. Alternatively, the likes of Uber or Amazon, who has now moved into the space in the US, could use their existing infrastructure, deeper resources and better name recognition to dominate the market.
Just Eat is a great company with a solid business model but with cash-rich competitors crowding in on its turf, I find its lofty valuation leaves far too little margin of error to make me comfortable buying its shares today.
One growth stock whose valuation is much more palatable to me is the Motley Fool’s Top Growth Share of 2017. Shares of this founder-led company trade at only 20 times forward earnings even after its stock price has risen over 190% in just the past five years.
To discover why the Fool’s Head of Investing reckons the stock could triple in the coming decade, simply follow this link for your free, no obligation copy of the report.
Ian Pierce 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 Auto Trader, Just Eat, and Rightmove. 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.