After a massive acquisition of the food delivery service Seamless, GRUB has spent ~$150mm acquiring four other RDS platforms in the past two years namely, Restaurants on the Run, Delivered Dish, DiningIn, and LAbite. The company sees its primary growth runway in the combined routing & delivery business (commonly known as RDS - "restaurant delivery services"). Currently GRUB connects 40,000+ restaurants and boasts 7.7+ million active diners. GRUB's fleet is paid near minimum wage by the hour - note that this necessitates an extra 15-20% tip for the driver, in addition to the delivery fee (which does not go to the driver). Use of this service requires an additional take of ~10% from the order total for restaurants. However, GRUB expanded its platform to include its own delivery fleet for restaurants. The restaurant was responsible for delivery in this model, typically using a small local contractor. The company took ~15% of transaction value for obtaining the online customer order and routing it to the restaurant. Restaurants would place menus on GRUB's websites and customers would place orders through the online GrubHub portal. GRUB historically ran an online restaurant order aggregator in the US, primarily through the brands GrubHub and Seamless. We think this is just the tip of the iceberg. The pressures have already been reflected by increasing CAC and a 4Q16 earnings pullback for lower-than-expected margin guidance for 2017. Despite big growth as a first-mover to the large online food and delivery service market, GRUB's business model is defenseless despite its perceived "network effect." GRUB's projected growth runway will be eaten up by competing products from goliaths: Uber and Amazon ( AMZN), which can both offer lower prices to consumers and operate at zero profitability to steal market share. (GRUB) is an over-hyped growth stock whose growth prospects are misunderstood by the market.
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