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The Just Eat share price drops 7%, but please read this before you buy

If you’ve been watching the Rugby World Cup, you must have noticed the fast food delivery ads. You’re thinking ahead to the hour between matches and planning something to eat in the gap, when what do you hear in the half-time ads but “Did somebody say Just Eat?

Just Eat (LSE: JE) isn’t the only one, and you’ll surely have noticed Deliveroo also featuring in heavy advertising. It might make you think “These are popular, maybe I should buy some shares,” but I’d suggest caution.

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Sales growth slowing

Just Eat has just released Q3 figures, and sales growth slowed to 8% in the quarter from 11% in the preceding period.  Most companies can only dream of quarterly sales growth rate of 8%, but Just Eat is in the critical market-growing phase when all competitors are trying to grab as big a slice of the cake as they can before the business matures.

That slowdown was enough to send Just Eat shares down 7% in morning trading. It’s exactly what happens, as I’m always pointing out, when a hot growth stock reports anything that is less than sparklingly optimistic.

Just Eat shares reached a peak of over 900p in February 2018, and have since fallen 35%. They’re still up 85% in five years, and that’s great when the FTSE 100 has gained just 6%. But that’s only for people who spotted the potential before it was widely recognised, and those who jumped on the bandwagon only after they saw the price soaring haven’t done so well.

Share price down

Today’s share price is still lower than it was in August 2016, and I think anyone thinking of buying on the current dip needs to bear that in mind and consider the long-term risk. Avoiding that pitfall is way more important, in my view, than seizing the long-term opportunity.

I don’t want to downplay the potential in the food delivery business, especially not as the research arm of UBS has suggested the current $13bn worldwide value of the business could balloon to $365bn by 2030. But weren’t people saying the same thing about the motor industry all those decades ago? And didn’t most early motor pioneers end up eating dirt? As Warren Buffett said about it, “when you saw what was going to happen with the auto … you should have gone short horses.

We’re not looking at such a dramatic development here, but more recently I remember market pundits enthusing over the size of the potential global market for online clothing sales, and investors followed by buying in big to ASOS. And while ASOS might have solid long-term growth ahead of it, it’s lost a lot of people a lot of money in the past couple of years.

Highly competitive

Food delivery is big business and it’s going to get a lot bigger, but we’re still in very early days. It’s very competitive and doesn’t have a great deal in the way of barriers to entry — just imagine if Amazon or any of the major postal delivery companies decided to add fast food to their services.

I’m not risking any money on early movers with shares on super high valuations. I’ll wait until the winners are offering attractive dividends.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and ASOS. 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.