JustEat Stock: More Robust Execution Is Needed (Hold Rating) (OTCMKTS:JTKWY) (2024)

Overview of JustEat and Investment Thesis

JustEat is an online food delivery marketplace that operates across four markets, and this can be broken down into:

• Northern Europe and UK & Ireland: JustEat is one of the largest players in these markets with a clear path to profitability. This is where they will be directing most of their investments.

• North America: JustEat is cutting back on their investments and prioritizing profitability in this market due to intense competition, even though they have a strong foothold via their acquisition of GrubHub in 2020. Currently, they are exploring a partial or full sale of Grubhub.

• Southern Europe & ANZ (Australia and New Zealand): JustEat is also reducing their investments in these markets where they have yet to establish a significant presence. These markets only account for a relatively small portion of its total GTV. As of 1Q24, they have closed their operations in New Zealand.

Management has made significant efforts in downsizing their operations to focus on markets where they have a stronger presence and which demonstrate a clear path to profitability. This has led to improvements in overall EBITDA and operating cash flow as they progress towards sustainable and profitable growth. In my opinion, their decisions were right in cutting their losses on markets where they do not have a strong competitive positions. Furthermore, I believe they had spread themselves too thinly in the past. However, I do still have concerns regarding management’s ability to re-accelerate growth in Northern Europe and UK/Ireland, which I will be diving into later. As of now, I am rating the company as a hold.

Discussion of 1Q24 Results

In 1Q24, its total GTV, excluding North America, grew 4.1% YOY to $4.2 billion, marking the fifth consecutive quarter of YOY growth since 1Q23. This growth was primarily driven by the 4.6% and 10.6% growth in Northern Europe and the UK & Ireland, respectively, and this is partially offset by the 14.7% YOY decline in Southern Europe, and ANZ (Australia and New Zealand).

Based on the 1Q24 earnings call, growth in these markets was driven by JustEat’s UK grocery business, which is currently rolled out to existing customers, and price hikes implemented by merchants to offset the rising inflation. This has resulted in higher revenue for the company, which was offset by the declining growth rate in Southern Europe and ANZ where they have reduced their investments. It was not disclosed if there was a rebound in growth for its core restaurant business. But if we observe 1Q24 results, its order growth in Northern Europe declined 1.3% YOY, and growth in UK and Ireland was up 0.7% YOY.

Given that the restaurant is its core business, this implies that the majority of the GTV gain in Northern Europe was driven by price hikes. Meanwhile, for UK and Ireland there may be a slight recovery in order growth from its restaurant business. In my view, this does pose a concern as I would have preferred to see growth driven by orders as this would result in a more sustainable growth in the long run, and this is also indicative of their ability to drive more consumers onto its platform. This is something to monitor for investors.

Meanwhile, the decline in GTV growth in Southern Europe and ANZ is attributed to their reduction in investments and the closure of its New Zealand operation. Management explained during the 1Q24 earnings call that New Zealand is a very small market , and since they do not have a strong presence it did not make sense to continue operating the business. As a result, they made the conscious decision to put profitability first and minimize cash burn, which caused GTV growth to decline. JustEat does have a large presence in Australia and will continue to operate there. But overall, management attributed the overall decline in the market to a reduction in investments, citing their efforts to concentrate on markets in Northern Europe and the UK and Ireland, where they are more well-established.

Turning to North America, growth continues to decline as its GTV fell 10.8% YOY to $2.3 billion, and this marks its sixth consecutive quarter of growth decline. Similarly, management has intentionally reduced its investments. To understand this rationale, competition is ferocious in the U.S. with prominent players like DoorDash (DASH) and Ubereats (UBER), who own 67% and 23% of the U.S. market share, respectively, while Grubhub (JustEat’s U.S. food delivery platform acquired in 2020) only owns minuscule of 8% (Additionally, if you are interested, I have also covered DoorDash extensively in my recent article). Like any other industry, companies with a dominant market share tend to engage in a winner-takes-all market. It is extremely difficult for Grubhub to compete and replicate DoorDash’s delivery infrastructure, scale, network effects, and brand recognition. Moreover, Grubhub is losing market share to DoorDash as well. Therefore, the management has retreated from this market, and instead focus on directing their resources into territories in which they have a stronger foothold in and demonstrates a clear path to profitability. Additionally, management planned to pull out from the market as they are currently exploring the partial or fall sale of Grubhub.

Note that the company only reports its yearly and half-year financials.

As of its latest 2H23 result, its total revenue, excluding North America, grew 3.1% to $1.5 billion, and similarly, this was driven by 11.6% and 3.2% YOY growth in Northern Europe and UK and Ireland, respectively, and this is offset by 17% YOY decline in Southern Europe and ANZ. Whereas, its North America revenue declined 19.2% YOY to $1.03 billion. In terms of FY23, total revenue, excluding North America grew only at a mere 0.3% YOY, and North America revenue declined 16% YOY.

Shifting to adjusted EBITDA, on a full-year basis, its overall adjusted EBITDA, excluding North America, grew 130% YOY to $404 million, and EBITDA margin (% of GTV) was 2.4% compared to 1.1% in FY22 and -0.7% in FY21. This was primarily driven by improvements across the regions, with the most prominent being the UK and Ireland, which grew EBITDA at 487% YOY, followed by improvement in Northern Europe (+16.9% YOY) and Southern Europe and ANZ (+39.8% YOY). Meanwhile, North America’s EBITDA grew 94% YOY to $126 million, its EBITDA margin stands at 1.3%, compared to 0.6% last quarter.

Due to reduced investments in Southern Europe, Australia, and North America, and the closure of their New Zealand operation, its total adjusted EBITDA, including North America, has improved significantly by 1600% YOY, and total adjusted EBITDA margin increased from 0.1% in FY22 to 1.2% as of FY23.

However, in terms of GAAP profitability, the company’s FY23 operating margin still stands at negative 39.3%, and there remains a long way to achieving profitability.

I get the impression that management has spread themselves too thinly in the past by operating in too many markets at the same time, and they lack the necessary expertise to compete with their rivals. Ultimately, this strategy backfired as competition was too intense, and it was not profitable to continue carry on. Additionally, while having EBITDA positive makes it easier for the management to attract buyers for its Grubhub business, there could be other factors that may hinder the sale, and that includes the value of the stock market as a whole, and buyers' concerns over the competition in the U.S. may also make it challenging for management to sell the company at a fair multiple as these may raise further questions on Grubhub's ability to generate profitable growth over the long term.

Balance Sheet and Operating Cash Flow

While JustEat is currently unprofitable, evaluating if they have a strong balance sheet is important. As of FY23, the company has a total debt of $2.36 billion comprising convertible bonds and lease liabilities, and a total cash of $1.72 billion, which results in a net debt of $705 million. According to its FY23 annual report, the $254 million of 2019 convertible bonds has already been repaid in cash in January 2024, with the next payment of $574 million due in Aug 2025, which the company has ample cash to repay.

As of FY23, its FCF margin stood at negative 0.5%, slowly approaching the positive FCF margin. This was mainly driven by improvements in profitability, as well as the decline in depreciation and amortization (D&A), and impairment loss, which consist of $599 million of D&A ($567 million in FY22) and $1.5 billion of impairments loss (versus $4 billion in FY22). This impairment loss was caused by the lower expected order growth and increased market competitiveness, which reduces its future expected cash flow across their markets, therefore, resulting in significant impairment loss. I do anticipate D&A and impairment to decline, and with continued improvement in net loss, I believe attaining a positive FCF margin will not be an issue.

Valuation

To evaluate the valuation of JustEat, I have gathered a list of competitors operating in a similar industry, which are namely Doordash, Uber, and Grab. In my opinion, I do find it difficult to find a list of comparable companies since peers like Uber and Grab operate in multiple industries, including the ride-hailing and food delivery industry. Additionally, I could also attempt to use the restaurant sector median multiple of 1.22x, but this would be inappropriate due to the different business models. Hence, I will be using DoorDash, Uber, and Grab for my comparable competitive analysis.

Currently priced at an EV/Sales of 0.6x, JustEat is trading at a significant discount to its peers. In my opinion, the market has probably factored in several risks: (1) In terms of profitability, it has the lowest negative EBIT margin of 39.3% and there remains a long way to GAAP profitability, (2) uncertainty over management’s ability to re-accelerate its growth in restaurant business in Northern Europe, and UK & Ireland, given that the majority of its growth is driven by price hikes and UK grocery business, and (3) competitors like Grab and DoorDash have shown clear market leadership, and delivered more robust execution in terms of re-accelerating growth, taking market share away from competitors, and profitability. Therefore, Grab and DoorDash may make a better investment in the long run. In my view, I believe JustEat's low valuation is warranted.

Conclusion

All in all, JustEat has made a prudent decision by downsizing its operations cutting back on investments in numerous markets, and focusing on markets where they are more confident in winning. This resulted in an overall increase in EBITDA across all regions as well as free cash flow, and these improvements are expected to continue in FY25. Moreover, the company also has a strong balance sheet to tide them through. While there are positives, I still do have my concerns with regard to management’s ability to drive growth in order growth in Northern Europe and UK & Ireland. Therefore, I rate the company as a hold.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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