Just Eat (LSE: JE) is one of London’s most celebrated tech success stories. Since coming to the market in April 2014, the shares have risen 155%, outperforming the FTSE 250 by 120%.
And I believe that the business is only just getting started.
Deals, deals, deals
Shares in the online food delivery company are rising today after it announced that the UK Competition & Markets Authority has provisionally cleared its acquisition of smaller peer Hungryhouse. The CMA said it found the merger is “unlikely” to result in competition concern. It believes Hungryhouse provides limited competition to Just Eat at present, as it is “much smaller in size and offers too few unique restaurants, making it increasingly difficult for Hungryhouse to attract and retain consumers.“
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The CMA also noted that rising competition from the likes of Deliveroo, UberEATS and Amazon.com present a “greater competitive challenge to Just Eat than Hungryhouse, and this is likely to grow as they expand.”
However, I believe that by buying its smaller peer, Just Eat will cement its position at the top of the market, and the increased scale will give it a substantial competitive advantage over the rest of the competition for three key reasons.
First mover advantage
Firstly, Just Eat currently dominates the online food delivery space, and it operates in a different market to Deliveroo and UberEats, which primarily focus on more upmarket restaurants and chains. The company’s model, of working with already established businesses and then charging a fee on top, coupled with its market dominance means that it is generating a profit as its peers struggle to make cash.
For the half-year to June 30, Just Eat reported a rise in pre-tax profit of 44% to £49.5m. In comparison, Deliveroo lost £129m on sales of £128m. Delivering food is easy, doing it well at scale is hard but it looks as if Just Eat has cracked the code.
Second, with its already profitable business, the group is making itself a vital part of takeaway infrastructure. Its upgraded ‘Orderpad’ technology allows the businesses it works with to access better wholesale prices for food and drink from names such as Booker and Coca-Cola thanks to agreements Just Eat has in place.
A cheap growth stock
Thirdly, all of the above means that the company is a top growth stock. Just Eat’s profits and revenues are snowballing, and the company’s drive to integrate itself with its business customers means that it is unlikely the firm will see a sudden drop off in custom overnight.
City analysts believe that the company can grow earnings per share at a rate of 37% per annum for the next two years. The shares currently trade at a forward P/E of 42 falling to 30 for 2018, indicating a PEG ratio of 0.8.
Even though the firm does not offer a dividend at present, I’m confident that management will initiate a payout during the next few years as growth takes a back seat. Indeed, the firm is cash-rich, converting just over 100% of net income to free cash flow, and the business has no debt, leaving plenty of space for shareholder distributions.
