Description

Note: I can't find TKWY NA ticker on VIC nor JET LN, so I had to use the old GRUB which is today not active anymore.

It’s almost becoming an annual VIC tradition to pitch TKWY long and I didn’t want to miss the opportunity to be the first one in 2022. I strongly recommend the excellent, albeit ill-timed write ups from Coyote (June 2020 – stock down over 50% since then) and tyro (March 2021 – stock down over 40%), where Takeaway.com history and business model is well articulated. I’ll give a brief overview of the group for background purposes; I encourage readers to read those 2 write-ups as highly informative.

Summary investment thesis

Most readers will know the bear case on TKWY – the company is slowly but surely losing market share in its key markets (Germany, UK, US) and the transition to a delivery model from a marketplace one is going to erode margins seemingly in perpetuity. Plainly put, we are in full agreement with the bear case but believe it to portray the history. It’s not even a bear case anymore – TKWY is losing market share, its margins are declining and yet we see the potential for the stock to double over the next 18-24 months. Buffett’s dictum that “in the short term the stock market is a voting machine” is very applicable to TKWY – the market has voted, and it voted out while valuation arguments (the “weighing machine”) are temporarily irrelevant. Inconsistent message from management to the market, ill-timed and expensive acquisitions, new ventures in adjacent unproven verticals and mounting operating losses have proven too much for even the most resilient long-term investor. That’s precisely why today we see a compelling opportunity. We expect near term disappointments on order volume trends and mounting losses to finally put pressure on management to do right strategic decision and exit the US market. Our bull thesis is not necessarily relying on Jitse deciding to sell the US business after less than a year from closing the Grubhub acquisition, but it certainly represents a nice incremental upside to the shares.

Background

JustEatTakeaway.com (TKWY) is a high-growth business which has massively derated due to several moving parts clouding the equity story. We believe that the market does not understand the evolution of TKWY from a pure marketplace business to a hybrid marketplace-logistics business and therefore does not understand the long-term profitability of this “hybrid” business model. Management has certainly been unhelpful in first decrying the validity of the 3rd party logistics model, then reluctantly accepting it and finally fully embracing it. The recent announcement of TKWY’s partnership with Asda and One Stop in the UK for grocery delivery partnership is proof that over the last 2 years, management’s strategic thinking has completely shifted in favor of 3rd party delivery models. “If you can’t beat ‘em, join ‘em” seems to have become Jitse’s new motto as it’s clear to everybody that 3rd party delivery models are here to stay as they are a better consumer proposition. Furthermore, while we believe the pandemic significantly accelerated the demand for restaurant deliveries and TKWY is ideally positioned to benefit from this secular trend, the pandemic has also introduced a significant amount of volatility and difficult comps for the market to digest. The pandemic has also, in our view, significantly reduced management visibility. For example, management’s latest guidance was for 2021, which was given to the market less than 2 months ago, is probably going to disappoint. TKWY guided for at least 45% order growth in 2021, which would imply c. 240m orders in Q4 (excluding Grubhub):

We think that the trading update next week will disappoint the market. Channel checks point to some 200-210m in orders in Q4, or only mid-teens order growth over Q4-20, which is significantly below guidance that implies c. 33-35% order growth in Q4-21:

As per chart above, UK and Germany are by far the biggest value driver being the two largest markets and the most profitable ones, but their margins have come under pressure in recent years:

Stay-at-home has been a huge factor in driving demand but has also made it very hard to predict quarterly figures. A top line order miss would then be interpreted as a confirmation of the structural pressures the business is exposed to. It all makes for a nice bearish narrative.

Because of this narrative, TKWY’s valuation multiples (based on EV to forward sales) dramatically shrank in the last 3 years from as high as 11x to below 2x today:

 We highlight below 5-6 important events (orange bars in the chart above) that in our view help to understand the derating process of the stock. These events corroborate the bearish narrative of a once-great-stock that lost its core values to empire building motivations on the part of the CEO, just as the company struggled under the pressure of mounting competition from logistic players (e.g. Deliveroo and Uber Eats). The events that appear above are:

·         TKWY merger with TKWY, creating a leading European player in the food delivery market

·         TKWY merger with Grubhub, creating a global leader in the food delivery market

·         DoorDash IPO, which highlighted mounting competition from logistic players in the US

·         Deliveroo IPO, which highlighted mounting competition from logistic players in Europe

·         Grocery delivery launches in both Germany and the UK, suggesting a clear strategy shift

We don’t necessarily disagree with this narrative, yet believe that the stock offers the opportunity of generating 20-30% IRR for the next 3-4 years in a base case scenario, with further upside in a bull case scenario.

Original business was a winner-takes-all proposition

The original Just Eat / Takeaway.com / Grubhub businesses were simple online marketplaces connecting consumers that wanted a take-away order to restaurants. The actual delivery of the order was then left either to the restaurants themselves or to customers (pick-up). The marketplace solution had 2 advantages to restaurants:

·         Offer a simple and easy online platform for little restaurants that weren’t tech savvy

·         Offer restaurants a demand generation tool. Small independent restaurants don’t have the budget to spend on advertising. Online aggregators can do this more efficiently

As other online marketplaces, online food aggregators benefit from strong network effects that fuel long term growth and create winner-takes-all situations, where the winner enjoys durable superior economics. As the customer base grows and customers get used to order food online and find new choices of restaurants, they will order increasingly more. As the marketplace grows and more orders are generated from the aggregator, more restaurants will join the platform. This will in turn increase the customer choice which will attract new restaurants…These network effects proved very powerful for Takeaway.com, the pioneer of online food marketplace business in Europe. Over the period 2016-19 (we’ve excluded 2020 because of distortions due to TKWY acquisition and COVID-19), such powerful network effect led to nearly 50% CAGR in orders:

As a first mover, Takeaway.com was able to gain a dominating position in virtually each market it operated. The business was launched by Jitse Groen in 2000 in the Netherlands, the company’s most mature market. Jitse Groen is still the CEO 21 years later and has replicated the successful Dutch playbook to most European markets.

Because of the network effects described above, the first mover typically has a massive advantage and creates nearly unsurmountable moats. There are various reasons for this. First of all, the marketplace business attracts small independent restaurants that don’t have online capabilities but do offer delivery services. These restaurants typically don’t want to deal with different marketplaces because it adds a degree of complexity. It’s much easier to manage 1 source of online orders rather than several. Restaurant loyalty is therefore an element that prevents new entrants to steal market share. Furthermore, happy customers are unlikely to leave the platform for an inferior one with a smaller choice of restaurants. Finally, the larger player enjoys economies of scale in marketing which can’t be easily replicated by a new entrant.

Such dominance naturally leads to superior economics. In 2016, the Netherlands, the company’s most mature market, reported an EBITDA margin of 63% The economics are very simple. Revenue is generated by charging restaurants a fee based on the order value, typically around 12-15% of the gross order value. There are some costs associated with processing (primarily credit card fees and some platform costs) but the variable costs are very low. Gross margins can be as high as 90%. What ultimately drives the margin is the amount of marketing the company is willing to spend to fuel growth. In the Netherlands where penetration is the highest, marketing is relatively low and EBITDA margins are therefore very high:

Vice versa, in markets where the company sees significant growth ahead, like in Germany, the company will not shy away from investing aggressively to reach a dominant market position like they achieved in the Netherlands. Over 2017-2019, the company spent cumulatively 65% of sales in marketing expenses alone, which is nearly 4x more than the level of marketing spent in the mature Netherlands. As a result, EBITDA margin was as low as -81% in 2017 in Germany, but this was a very deliberate strategic move that would ultimately fuel growth.

The results are there for all to see: in 2020 revenues jumped over 80% and EBITDA margins reached 33%, from 2% in 2019 and -43% in 2018.

The reason for these superior economics is customer loyalty. Once a customer is acquired, it tends to stick with the platform and orders increasingly more. Once market dominance is achieved and marketing spend normalizes, superior marginality emerges. The chart below shows that once acquired, new cohorts of customers generate revenues in a very predictable way:

The current fear is that TKWY’s cake will be eaten in its key markets by the likes of Uber Eats or Doordash. For example, in November Doordash acquired Wolt, which operates in Germany, signaling competition ahead in Germany. We are actually not too worried about this. TKWY seems to maintain its dominant position there and even Delivery Hero had to backtrack and announce the exit from Germany a few months after launching it. TKWY’s leadership in its key European markets is safer than people think.

Furthermore, notwithstanding the relatively maturity of this business in many countries, the room for growth remains enormous. Penetration in most of Europe remains very small and the there is still a huge number of restaurants that deliver but don’t have online capabilities.

The above-described desirable business attributes (barriers to entry, high margins, high growth) led TKWY to attract high valuation multiples. In Summer 2019, the stock traded on over 10x forward sales and if offered a clean equity story to investors.

3rd party logistics + M&A ruin the party

In August 2019, the company announced the intention to merge with Just Eat. Just Eat has a very similar business model to Takeaway.com being primarily an online marketplace for food delivery where restaurants fulfill themselves the delivery. Just Eat key market is the UK which represented the majority of sales and nearly the entire profitability of the group. EBITDA margins in the UK were close to 50%, so a level close to the mature Netherlands market.

While the deal did make sense strategically as it creates the European leading marketplace, it did create a complication to the equity story. First and foremost, Just Eat owned international businesses outside Europe, especially in Canada and Brazil, that didn’t really fit with Takeaway.com business model. Canada in particular was something tricky to understand. The Canadian business, called SkipTheDishes, is not the typical marketplace business; rather, it’s a logistic provider where the platform offers restaurants a delivery service. This was a major shift for Takeaway.com as it put itself in direct competition with other logistic providers such as Deliveroo, Uber Eats and DoorDash (more on this below). TKWY consolidated revenues jumped nearly 10-fold between 2018 and 2020 with gross margins going from 81% to 56%. The biggest problem though was the fact that it immediately put TKWY in direct competition with Deliveroo, which was just about to do an IPO and was aggressively expanding its London network. For the first time in its own history, TKWY had to tackle face-on a competing, yet different business model. It’s clear that Just Eat management at first underestimated the impact of new entrant logistic players and favored short term margins over long term market share. The move allowed Deliveroo to quickly gain market share. To put things in perspective, in 2019 Deliveroo grew its orders over 60% Vs. only 8% for TKWY.

The single biggest mistake that Just Eat, and TKWY, management did, was to assume that the logistic food delivery business model had very little overlap with the classic marketplaces. Restaurants would either opt for one or another, depending on their preference. Small moms and pops restaurants with a very low average value per order, would opt for a cheaper marketplace model and take care of deliveries themselves. Larger, more sophisticated, and higher ASP restaurants could afford to pay the hefty (c. 30%) charges that the likes of Deliveroo and Uber Eats would take.

The reality turned out to be quite different. While to a certain extent the churn is low and there are not too many restaurants that move from one model to the other one, for consumers, a fully integrated logistic provider offers a better proposition. As customers shifted to delivery models, some restaurants did too, eroding TKWY’s competitive advantage. Jitse Groen then compounded Just Eat management mistakes by going after the US market. In June 2020, TKWY announced the intention to merge with GrubHub, the leading US food delivery marketplace.

This move is a lot more controversial than the Just Eat acquisition because the US market is very different from the European market. In Europe, as we shall see below, logistic players like Deliveroo are growing rapidly but it’s a profit-less growth and marketplace businesses are still larger in size. The US market is much more competitive and delivery models like DoorDash are significantly affecting the incumber marketplaces. In October 2019, GrubHub share price collapsed 43% in 1 day as the company warned of weaker margins ahead due to a maturing market and intensifying competition. For reasons we shall describe below, the US market is one where delivery models can thrive and affect incumbent marketplaces. The choice of TKWY to merge with GrubHub turned out to be disastrous and led to a further derating of the stock. Furthermore, food delivery is a local business. There are going to be very little synergies in having a strong European business and a US one. The move was very much viewed as simple empire-building without a strategic rationale, with the simple aim of creating the world’s largest food delivery company, as per #1 goal stated by the company.

As a result of the transaction, TKWY will be the absolute world largest marketplace business, dominating in Europe and North America. There is no debate on the fact that TKWY is the ultimate marketplace winner now comprising the 3 original pioneers in the space, but the debate is now shifting to Marketplace Vs. Logistics and to the future viability of the marketplace business as logistic players are significantly outgrowing incumbent marketplace players:

Marketplace aggregators are losing share to 3rd party delivery companies like DoorDash and Deliveroo. The GRUB transaction highlighted this issue as the US market is the one that saw the fastest growth of Logistic players compared to aggregators. It also raised questions about the Just Eat transactions as the UK is another market where 3rd party logistic players gained significant share from aggregators:

As one can see from the chart below, in little over 2 years GrubHub market share in the US went from 39% to 16%. GRUB problems are now TKWY problems, and the market is scratching its head as to why Jitse Groen went ahead with this acquisition. There is a narrative about Jitse state of denial in terms of the new reality of the market. Bears argue that marketplace models are in structural decline as logistic solutions emerge. As per chart below, this is no longer a bear argument, it’s a reality:

GRUB problems are very evident. As per chart below, while the company was able to maintain a very healthy top line growth (+47% in 2020 and consistently above 30%), its EBITDA margin went from 30% in 2014 to 6% in 2020:

These dynamics clearly worried TKWY investors and finally made an impression on CEO Jitse Groen that seemed to get the point. As per slide below from most recent capital markets day, TKWY now sees delivery as a natural extension of its marketplace business, rather than a simple defensive move:

TKWY today is in a very different place than 2 years ago when it was “fighting” delivery. It now fully embraced the delivery opportunity. The results are pretty obvious as per chart below that shows how in the UK where TKWY is pushing back very hard, TKWY is regaining market share against Uber Eats and Deliveroo.

However, this is introducing lots of moving parts and complications. In order to better understand long term margin opportunity for TKWY, it’s crucial to understand the differences between aggregators and logistic (i.e. delivery) companies.

Economics of Marketplace Vs. Delivery

It’s quite tricky to deconstruct the actual economics per channel because the company reports delivery costs at a consolidated level only and each country has different proportion of orders being delivered by TKWY Vs. delivered by own restaurants. We can nonetheless make a few assumptions to get a good view on the economics of delivery by taking the Netherlands, which is the most mature market in the world.

Before we do this, let’s lay out our fundamental understanding of the market and posit some key assumptions:

·         Logistic players and marketplace players are not 100% overlapping. They don’t necessarily compete with each other, although they do on the margin. There are some restaurants that do not want / need to use 3rd party logistic companies for a whole host of reasons:

o   Many restaurants don’t want to pay away a hefty commission for delivery, they prefer to do it themselves. Marketplace commissions are much lower than logistic commissions

o   Labor is fungible – some waiters / family members / cleaner that aren’t too busy in the restaurant can do the delivery. It doesn’t pay to have extra people doing the delivery for you

o   Restaurant owners want to keep the relationship with the client and the customer experience

As a result of the above, some restaurants will only choose marketplace solutions. Vice versa, restaurants that can’t deliver, will only choose logistic players. Many restaurants that couldn’t deliver until now are now using the Deliveroo of the world to give them this additional capability. This is very different dynamic from having restaurants moving from marketplace to logistic solutions – one market is simply growing faster than the other. It’s therefore incorrect to say that “aggregators are losing market share to logistic players”

·         Logistic is a local market with very little, if any, economies of scale. It’s all about creating local network effects. If most restaurants are on TKWY in London but are on Deliveroo in Manchester, it’s going to be very difficult to change the status quo. Just because one company is winning in 1 region, it doesn’t mean they have a right to win in another

·         There are some very important social / topographical /cultural factors that affect one model versus the other:

o   High population density makes delivery economic for restaurants. In very densely populated areas, one would expect marketplaces to thrive. In Tier 3 cities, we would not expect marketplaces to gain much traction

o   For small independent restaurants, aggregators like TKWY play an important demand-generation function. QSR (Quick Service Restaurants) chains don’t need lead generation and therefore don’t need aggregators. They do need delivery services though. We would therefore expect logistic players to dominate the QSR space

o   For reasons we shall explain below (mainly tipping), the US market is very different from the European one. North America favors logistic players, Europe favors aggregators

·         The economics of online delivery varies massively according to the kind of client. A small independent restaurant will pay a lot more than McDonald. Just as small European hotels make all the margins for Booking.com and the large US chains may be loss leaders, most of marketplace margins are made on small independent restaurants

·         Some logistic players (e.g. Deliveroo, Uber Eats) heavily employ the gig economy via an army of independent delivery agents which are not given a proper salary, benefits etc. Other players like TKWY decided to internalize completely the delivery function and therefore hired full time employees as delivery agents

·         Finally, and most importantly, a marketplace company can also offer logistic solutions. As we shall see below, TKWY is now operating a hybrid model where some restaurants deliver and for some others, TKWY is in charge of the delivery

Armed with the above, we can better understand the evolution of TKWY. In 2016, TKWY management saw the competition of logistic players coming and decided to offer its own delivery service called Scoober. Differently from the Deliveroos of this world, Scoober includes full time employees that are insured and properly employed. The move was a defensive one on the part of CEO Jitse Groen. Jitse was very clear that the move was not aimed at generating any profits from delivery but at making sure TKWY would retain market leadership in its stronghold markets. There would be no reason for restaurants to go to Deliveroo / UBER Eats if TKWY can also offer delivery. TKWY is now a hybrid business with a small but rapidly growing number of new restaurants joining the Scoober platform. In 2020, overall orders grew 42% but delivery orders more than doubled.

As discussed above, TKWY has now fully embraced the delivery model and it will have almost 50% of its order in delivery orders by 2025:

The financial impact of this shift in strategy is very large. Delivery players are today not profitable In Europe. They subsidize both consumers (free lunches) as well as restaurants (promotional rates). TKWY had therefore to compete against new entrants in the market with deep pockets and no focus on profitability. Understanding the exact economics of a hybrid business model is difficult as there are no clear disclosures, but we’ve used the Dutch business, TKWY’s most mature one, to try to get a good view on the underlying economics.

As per above table, while EBITDA more than doubled in the Netherlands between 2016 and 2020, margins shrank from 63% in 2016 to 2020 due to the hybrid model that witnessed an explosion of low margin delivery orders. We tried below to figure out the underlying economics of each type of order:

The above exercise allowed us to figure out how much money the company made on each marketplace order Vs each delivery order. The results are very interesting and shed a light on underlying profitability of the business:

In 2020 for example, when EBITDA margins dropped to 44% from 55% in 2018 in the Netherlands, we figure that Marketplace underlying margins remained very high at 55% but the delivery business was heavily negative (-24% EBITDA margin). We think this is very important for 2 reasons:

·         It demonstrates the sustainability of the high margin business of marketplace and validates TKWY strategy to grow the delivery business to protect the marketplace business

·         While the delivery business will never reach marketplace margins, we think it could eventually turn positive

Regarding the 2nd point, we think that loss-making competitors such as UBER Eats and Deliveroo will eventually have to raise prices and stop crazy promotions in order to reach profitability. Being now publicly listed companies, they will need to show that the business can generate positive margins. This can only happen via price increases or reduction in marketing expenses, which are both going to benefit TKWY. Furthermore, these players employ gig-economy workers underpaying them. As per article below, Deliveroo riders can earn as little as 2-3 pounds an hour!

https://www.theguardian.com/business/2021/mar/25/some-uk-deliveroo-riders-earning-just-2-an-hour-survey-finds

This is not sustainable. Deliveroo already had to take massive legal provisions because of ongoing litigations in different European jurisdiction where the legal status of gig-economy riders has been challenged: “Governments and government agencies in Australia, the Netherlands, Spain, and Italy are investigating or challenging the current and/or historic basis on which riders have been engaged in those countries. We have recognized provisions or contingent liabilities for these countries”. While TKWY pays its couriers at least the minimum wage, logistic players are using legal loopholes to underpay their couriers.

 This is not sustainable and will eventually lead to them having to hire couriers just as TKWY does. Let’s take Deliveroo for example. It is not even breakeven today notwithstanding the very low delivery costs:

We estimate that Deliveroo spends c. 5 EURO in delivery cost per order. Even assuming that 80% of these costs go to the courier (say 4 EURO per order) and a courier can make 2-2.5 deliveries per hour (we don’t have this data, but we know that DoorDash average delivery time is 30m, so they make c. 2 deliveries an hour), it would imply at best 8-10 EURO per hour, which is well below the UK minimum wage, and this is before fuel costs, insurance etc.:

We think Deliveroo will inevitably have to significantly cut (at least in half) its marketing expenses (so reduce promotions) in order to remain breakeven in the face of higher labor costs. This will benefit TKWY which we think will ultimately reach breakeven on its delivery business:

The analysis above shows that the implied delivery fee per order is c. EUR3 at a consolidated level, which is simply too low and will inevitably increase, as per the company’s slide:

We therefore think that TKWY delivery business will eventually post positive, albeit small, delivery margins which will lift overall margins. The 5% EBITDA margin as % of GTV target given at its latest capital markets day is in our view highly achievable, having now better understood delivery economics.

The US is an entirely different kettle of fish though

The above analysis was very useful in understanding the dynamic in the European market. In North America (US and Canada), things are actually very different due to cultural differences. The single biggest difference is the fact that Americans are used to tip drivers and delivery is a service one is expected to pay for. It’s just part of the overall price. Let’s take for example a standard DoorDash illustrative economics as per company slides:

The restaurant sells a meal for $22.40 or $24.10 gross of tax and pays DoorDash $4 for the service of having generated the lead and organized the delivery. In a normal world, $4 would clearly not be enough to cover the platform costs as well as the delivery costs. However, differently from European businesses, DoorDash can charge the consumer 2 extra fees:

·         Delivery fee – the consumer will pay a separate, clearly visible $5.50 delivery fee

·         Tip – in North America, it’s accepted practice to tip the driver c. 10% of the order. In the above example, the tip will therefore be $3.30

In other words, DoorDash will collect from the consumer $8.80 ($5.50 delivery fee and $3.30 in courier tip) of which only $7.90 will be passed on to the courier and $0.90 will be kept for itself. DoorDash will therefore keep a total of $4.90 per order ($4.00 from the restaurant and $0.90 from the consumer) net of all delivery costs. It makes the business sustainable. DoorDash is now (barely) profitable thanks to the above-described business model and delivery fee + tip which is chargeable to the customer.

If TKWY had a similar setup in the Netherlands and could charge the customer 10% of the gross order in courier tip, it would immediately be profitable:

The absence of tipping in Europe makes logistic based food delivery profitability more challenging, whereas it’s structurally profitable in the US. GrubHub has a very similar structure and charges delivery fees and a tip to consumers if they are to deliver the food, or they simply charge a marketplace fee:

From GrubHub perspective, they are theoretically indifferent between marketplace orders and delivery orders. In each case, they charge an amount that allows them to make the same gross profit per order, or $3.40 in the example below:

Note that the illustrative $3.40 the GrubHub wants to make on its hybrid business is awfully close to the EUR3 per order that TKWY is targeting. The big difference is that in the US, it’s easy to have the consumer funding the courier while it’s much harder to do so in Europe. The above explains why DoorDash was able to grow so fast compared to peers.

However, this is only part of the story. While we described above the difference between a marketplace order and a delivery order, not all delivery orders are created equally. There is a huge difference in economics between orders from smaller independent restaurants Vs orders from large QSR chains. GrubHub provided this illustrative economics example for 2 orders, one from an independent small restaurant and another from a larger chain. Because the larger chains don’t need GrubHub as a demand generation lead, the commission paid to them is much lower than in a case of an independent restaurant. Furthermore, the average order value from an independent restaurant is much higher than from a QSR:

As a result of the above, the higher the percentage of independent restaurants in the mix, the higher the margins. Logistic companies were able to grow rapidly with large QSR contracts that came at very low marginality but boosted top line. It’s therefore very important to understand both the different types of restaurants in the network as well as their location. The majority of restaurants are in non-Tier 1 locations (suburban) and within this market, DoorDash dominates and has over 50% market share with GrubHub having only 13% market share having lost considerably market share:

However, these are typically the less interesting markets, dominated by logistic players and large QSR restaurants where margins are very thin. GrubHub is still relatively strong in Tier 1 cities:

This is a very local market. Tier 1 cities are where you have lots of independent restaurants whereas Tier 2 cities have a higher proportion of QSR. Unsurprisingly then, GrubHub has the smaller proportion of chain orders as % of total compared to competitors DoorDash and Uber Eats. This suggests that even as GrubHub moves to a delivery model, it should have structurally higher margins because of its still dominant position in Tier 1 cities like NYC and Boston. It has a better business mix.

The conclusion of the above analysis is the following:

·         While the economics of 3rd party food delivery logistics in Europe are clearly inferior to Marketplace models and the Deliveroo model is fundamentally challenged, this is not true in the US where the likes of DoorDash have a sound and defensible business model and are therefore likely to continue gaining market share Vs marketplace players

·         Food delivery is a very local business model. A company can be very strong in NYC and very weak in San Francisco

·         Not all delivery orders are created equally: there is a huge difference between independent orders and large QSR chain orders even within the same city

So why did TKWY decide to buy GRUB? We think Jitse wanted to replicate the European playbook, i.e. strengthen the delivery capabilities to protect the high margin marketplace business. The strategy failed though because the likes of Uber Eats and DoorDash were able to quickly gain market share even in GRUB’s strongholds like NYC. These delivery models are much better suited in the US than in Europe and can therefore significantly challenge the first movers such as GrubHub. We think that GrubHub’s future is destined to be limited to defending their current strongholds; growth in the rest of the US will be hard to come by. In hindsight, the GRUB acquisition was a big mistake for TKWY.

In summary: we think that Jitse Groen miscalculated the difficulties inherent to the US market. Competition against DoorDash and Uber Eats in the US is structurally more formidable than in Europe. We therefore think the choice for TKWY will be to either a) dispose of the US business or, b) limit losses by focusing on the few strongholds left. Either way, we think the US will no longer be a focus for management, especially as recent fee caps extension made profitability targets harder to reach. Today, the market implicitly values the US business at negative equity value. We think it’s either worth something to competitors (scenario a) or it’s a zero / close to zero in “runoff” scenario b above.

Valuation considerations

We therefore have 2 substantially different business to evaluate:

1.       The US business, which we value at zero for conservativism, even though it does have strategic value to potential suitors

2.       The European business, which is in the midst of transition from marketplace only to a hybrid model

As per discussion above, we strongly believe the European business will be able to reach its 5% GTV EBITDA margin in the medium term. Even assuming a 4% margin by 2026, we expect TKWY excluding the US to generate at least c. €1.5bn in EBITDA.

To put things in perspective, TKWY’s market cap is today little over €9bn. Assuming zero value to the US business and c. €2-2.5bn value to its stake in iFood (backed by a recent offer turned down by the company), the market is effectively valuing the core TKWY business at c. €7bn EV, or little over 4x EBITDA 2026 on our estimates.

The valuation dislocation is therefore very clear. The path to realize the valuation gap is certainly unclear and will depend on a) management willingness to dispose of its US business and b) time it will take for competition to become more rationale in Europe. Our view is that given the pessimism on the name, it wouldn’t take much for the market to push the stock significantly higher as profitability start to stabilize in 2022. Vice versa, there is so much pessimism baked in the stock it’s actually hard to envisage substantial further downside.

Catalyst

• Sale of US business
• European margins to trough