Description

Waitr (WTRH) Short Pitch

QUICK SUMMARY

We believe that SPAC-backed regional food delivery business Waitr Holdings is misunderstood by investors and the sell-side, is already exhibiting deteriorating unit economics that will only degrade on a go-forward basis, and is materially overvalued on both a relative and absolute basis. From its current $11.20 per share ($780m market cap / $845m EV) we see ~60% downside within 12 months to ~$4.55. A more draconian scenario, which we view as the likely end state, suggests the equity will prove worthless due to unsustainable unit economics analogous to MoviePass (HMNY).

Waitr’s core strategy – rolling out food delivery service to “underserved” tier 2, 3 and 4 markets – is fundamentally challenged. We believe that these currently subscale markets are likely to develop in one of two ways: they will either 1) prove capable of supporting the requisite density of demand for the model to work, in which case scaled players with better mousetraps will ultimately win or 2) prove fundamentally unattractive, in which case Waitr will never be able to materially scale market-level profitability. In either scenario Waitr loses, and as such we see a high probability that Waitr is never able to generate positive FCF, implying minimal value in the equity. We are seeing escalating competitive intensity and believe that unit economics are unwinding in real-time, with a near-term path to success as numbers disappoint, cash burn escalates, and the company is forced to tap the capital markets in the next 6-18 months.

Key points of the thesis:

1. Competitive intensity is rising on a massive scale, which will pressure Waitr’s growth profile and cost structure
2. Waitr is sub-scale with a structurally dis-advantaged business model (W-2 drivers) vs. Uber Eats and other key competitors, suggesting it is unlikely to emerge from the current landgrab/investment cycle a victor
3. Waitr is materially overvalued on a relative basis due to an apparent disregard for the distinction between delivery and marketplace business models on the part of sell-side analysts & investors
4. SPAC background (and related incentive and messaging issues) meaningfully calls into question management’s previously articulated guidance and investors’ moonshot hope for an acquiror to come to Waitr’s rescue
   1. We won’t belabor the point or the overwhelming statistical evidence, but suffice it to say that SPACs rarely have a happy ending for post-combination investors (particularly those that consummate the transaction immediately prior to the redemption deadline, as was the case with Waitr)

How do we get paid? We believe:

1. Revenue will disappoint
   1. Real-time, rapid geographic expansion of Uber Eats / DoorDash / GrubHub / Postmates will impede Waitr’s ambitious growth expectations
   2. Waitr’s guidance for $250m of 2019 revenue requires a re-acceleration of sequential growth in dollar terms, contrary to the recent trend of sharply deteriorating sequential dollar growth
2. EBITDA losses will intensify
   1. Waitr’s segment EBITDA losses were materially worse than expectations in Q4, and management declined to offer any specific commentary on the trajectory of 2019 EBITDA losses in the Q4 earnings release or on the conference call, which we take as an ominous signal
   2. The aforementioned rising competitive intensity appears to already be requiring increased “investment” in delivery drivers, sales and marketing and R&D, a trend we expect to exacerbate going forward
3. Cash burn is likely to require a material equity issuance within the next 12 months
   1. The company has a net debt position ($60m Convertible Notes & $67m Term Loans) and just $49m of cash on the balance sheet as of 03/01/19, with cash burn likely in the range of $30-40m in 2019
   2. Waitr’s credit agreement with Luxor requires maintenance of at least $15m in liquidity – as such we believe the company will have to come to the capital markets (likely the equity markets) in the near term (indeed, the company filed a $300m mixed securities shelf registration on 04/04/19)
4. Further, two recently filed class-action suits alleging Waitr fails to compensate drivers for personal vehicle usage, and therefore is not satisfying minimum wage requirements, represent a significant risk to the business model
   1. If required to compensate drivers fully for the use of their vehicles, Waitr would experience significant pressure on its average cost to deliver, which would likely render the business model unsustainable
   2. This development appears to have gone entirely unnoticed by the sell-side and has yet to be disclosed in company filings – Waitr is due to respond to the complaint by April 26th (after requesting two extensions, details available here)

Ultimately, we see Waitr as the Moviepass of food delivery – a flash-in-the-pan consumer-facing internet business with unit economics that are unsustainable and as such we suspect the Waitr equity story will come to a similarly dramatic ending.

FULL PITCH

Company background:

Waitr is a food delivery business operating in the Gulf Coast region and headquartered in Lake Charles, Louisiana. In late 2018, Waitr was acquired by Landcadia, a SPAC sponsored by Tillman Fertitta’s Fertitta Entertainment and Leucadia National (now Jefferies Financial Group), for ~$300 million in cash and stock, which represented 4.8x and 2.4x expected 2018 and 2019 revenue, respectively. The initial Waitr transaction was completed on Nov 15, 2018, and Landcadia’s ticker was correspondingly changed to WTRH. Notably, this transaction deviated significantly from the stated target industry of entertainment / hospitality and was consummated less than a month before Landcadia’s deadline, with Landcadia making an on-the-spot acquisition offer after their first meeting with Waitr’s management team (see S-1 and merger proxy background section for more detail).

Waitr subsequently announced on December 12, 2018 that it had reached an agreement to acquire Bite Squad, a Minneapolis-based delivery business for $320 million in cash and stock. Both Waitr and Bite Squad have focused on becoming early leaders in previously “underserved” markets, specifically DMAs outside of the top 50. Combined, the two businesses currently operate in 86 markets across 22 states. At the state-level, we estimate that Louisiana remains the company’s largest contributor at >20% of revenue, followed closely by Florida where Bite Squad had a large presence. These states are followed by Arkansas (12%), Texas (9%) and Alabama and Minnesota (~7.5% each) in terms of relative importance.

Waitr operates a three-sided marketplace featuring restaurants, prospective diners, and delivery drivers. Individual diners who download the app (~90% of orders placed through the company’s smartphone application) and register are presented with a selection of local restaurants that have loaded their menus onto the platform. The consumer selects his/her meal on the platform and remits payment to Waitr. One of Waitr’s drivers (W-2 drivers employed by Waitr) is then assigned to pick up the meal from the restaurant and deliver it to the customer. The driver is paid an hourly wage (~$5) plus tips. Waitr generates revenue in the following ways:

1. Charging a $5 per-order delivery fee to customers
2. Extracting a commission from restaurant partners, typically 15% of the bill excluding tip and tax (this rate is 20%+ at Bite Squad)
3. Charging new restaurant customers ~$1,500 to onboard onto the system (though this revenue contributes negligible profits as most is used to purchase tablets for placement in the restaurant)

The business’ largest cost line item is “operations and support” which principally consists of paying drivers to deliver customers’ meals and handling customer service calls. Importantly, unlike nearly every other publicly traded “food delivery” business on a global basis, Waitr did not start out as a “pure marketplace” where restaurants were responsible for delivery. Instead, Waitr and Bite Squad have always been responsible for executing delivery on behalf of their partner restaurants.  In this sense Waitr can be thought of as a food-focused logistics business with a marketplace attached to it. While GrubHub (Waitr’s most relevant comp, though a far from perfect one) has been transitioning its business model toward delivery, it still generates ~70% of GMV from marketplace-style orders. As such, its average dollar of revenue is much more valuable than Waitr’s average dollar of revenue, as a much lower percentage of GRUB’s revenue goes to paying delivery costs. This is illustrated by GRUB’s ability to generate higher gross profit per order, despite a materially smaller average order size and lower average take rate.

Waitr’s business has experienced remarkable growth – from a near standing start in 2015 the business has grown organically to ~$285 million in Gross Food Sales and ~$70 million in revenue in 2018. This growth has been driven by a healthy combination of expanding geographic reach, increasing penetration of restaurants and users within its initial markets, and a significant step up in the business’ effective take rate beginning in late 2017. While Bite Squad has been more dependent on acquisitions to fuel growth, it too has grown at a triple-digit rate, from <$20 million of revenue in 2016 to >$80 million in 2018.

Despite this rapid topline growth, neither business has shown material operating leverage, and both have burned cash to fuel expansion. In fact, one of the most important inputs to the model – the average cost to deliver a meal – has been showing steady inflation at Waitr, and neither business has demonstrated an ability to scale sales and marketing spending. We believe these are early indicators that Waitr’s marginal unit economics are vulnerable to both incremental competition in existing markets, and a more robust competitive landscape in new markets. Given Waitr’s net debt position and its rich valuation on both an absolute and relative multiple basis, we think the equity will prove extremely vulnerable to any (i) marked revenue slowdown or (ii) increased cash burn to meet market growth expectations. We believe that at least one, if not both, of these is likely to occur given our fundamental concerns about the business model, and the real-time increase in competitive intensity.

Short thesis:

I. Competitive intensity is escalating rapidly in real-time

We believe Waitr is an archetypal “first-mover first-loser”. While founder / CEO Chris Meaux did an impressive job identifying product / market fit and bootstrapping the company into existence, the company is now facing a significantly more intense competitive environment and is likely to end up as roadkill in the ongoing food delivery landgrab being pursued by Uber Eats, GrubHub, DoorDash and Postmates. We believe the impact of these players’ rapid geographic expansion is already being reflected in Waitr’s recent financial results, which have shown a concerning combination of rapidly decelerating revenue growth and accelerating expense growth. We expect this pressure on the business’ unit economics to persist for the foreseeable future.

The four aforementioned national delivery players spent much of 2018 rapidly expanding the geographic coverage of their owned delivery services:

• GrubHub added 125 delivery markets in the 4th quarter alone and claims to now cover the vast majority of the US population
  
  • GRUB is now offering delivery in ~300 markets
  • Waitr has previously articulated a TAM of markets 100-500 by size, implying GRUB alone is now present in at least half of Waitr’s target markets
• DoorDash expanded coverage from 1,000 to 2,000 cities in 2018 and has raised >$1bn in the last ~12 months
• Postmates announced a 100+ city expansion in July, bringing coverage to >50% of the US population, and is set to IPO in the first half of 2019
• Finally, Uber, perhaps the most potent threat to Waitr’s ambitions, has been investing aggressively behind Uber Eats, which is set to feature as a key growth driver for the company over the medium-term, and has publicly articulated plans to push deeper into suburbia
  • Uber’s recently filed S-1 highlights the explosive growth the Eats business has experienced – Growing global gross bookings 2.7x in 2018, and per third party research firm Edison Trends reaching the #3 position in the US, behind DoorDash and GRUB per (via WSJ)
  • We suspect the notoriously aggressive Uber is unlikely to be content with third place, and that Eats will continue to see significant investment in the US after the company’s planned $10bn IPO

These competitors have structural business model advantages and are sophisticated, extremely well-funded, and willing to invest aggressively in the near-term to win over the long-term. Even if they do not dislodge Waitr from certain markets, we believe they will force Waitr to put up an expensive fight if they want to maintain their position – as evidenced by GrubHub and DoorDash’s recent expansion into Waitr’s home market of Lake Charles.

To meet its ~60% organic topline growth guidance in 2019, Waitr will have to continue to aggressively expand its geographic reach. Given the scale of geographic expansion being undertaken by Waitr’s national competitors, we believe Waitr will find it increasingly difficult to identify additional “greenfield” opportunities, instead facing competition from day one in many new markets.

Finally, we believe that the impact of this heightening competitive intensity is not prospective, but is in fact happening in real-time, the evidence of which can be seen in Waitr’s most recent financial results:

• When marketing the Landcadia / Waitr combination to investors (see p. 56 here), management presented a bullish medium-term outlook, calling for an 80% revenue CAGR from 2018-20 with EBITDA margin scaling from -10% in 2018 to positive 3-5% in 2020
• Despite presenting this guidance in October 2018 (i.e. during the company’s 4th quarter), EBITDA margins have come in materially worse – with actual margins for 2018 of -19%, nearly double prior guidance of -10%, with a substantial deterioration in Q4 when EBITDA margins blew out to -32%
• Unsurprisingly, management has declined to reaffirm prior targets, and refused to offer any specific commentary on the trajectory of EBITDA losses in 2019, suggesting to us that the fourth quarter trend will continue and that medium-term EBITDA losses (and cash burn) are likely to be substantially worse than market expectations
• Additionally, Waitr’s revenue growth showed a sharp sequential deceleration in the fourth quarter, despite the positive benefit of seasonality
  • After reporting >$10m of sequential GFS growth and >$3m of sequential revenue growth in the first three quarters of the year, Waitr’s GFS and Revenue grew by just $5.3m and $1.6m respectively in the 4th quarter
  • This equates to sequential percentage growth of GFS and Revenue of just 6.8% and 8.1% respectively, down from 18% and 20% in the third quarter
    • Key KPIs – Restaurants, Orders, and Active Diners – each grew roughly half as fast sequentially in Q4 as they did in Q3
  • Further, Waitr’s filings specifically state that the company should benefit from the positive effects of seasonality from Sept to May, suggesting that, all else equal, the business should have accelerated in the 4th quarter vs. the 3rd quarter … instead the opposite occurred
    • As a point of reference, GrubHub has never reported sequential 4th quarter revenue growth of <11%, and reported Q/Q revenue growth of 16% in 4Q18, which is twice as fast as Waitr on a materially larger base of revenue … nevertheless, Waitr’s management, investors and analysts believe the company will grow pro forma revenue >60% Y/Y in 2019 whereas GRUB is expected to grow just 36%
  • These quarterly trends are laid out in detail below:

Rather than consider the significance of these deteriorating sequential trends or query management as to their causes, analysts have chosen to ignore the company’s actual financial results in the quarter altogether and instead unquestioningly accepted management’s growth narrative at face value. We believe that any thoughtful, impartial analysis of Waitr’s Q4 results will lead one to the conclusion that the company is beginning to face a much more challenging competitive environment, with important implications for the achievability of growth ambitions and the cash burn that future growth will require.

II. Key competitors have advantaged business models

There are certain intuitive advantages to national scale which put Waitr, as a regional player, at a relative disadvantage vs. key competitors – primarily providing national competitors with the ability to amortize investments in technology and national marketing across a much larger base of users.

We also believe that Waitr’s reliance on employed W-2 drivers puts it at a relative disadvantage vs. the 1099 contractor model of its national competitors, giving Waitr less flexibility to match supply of drivers to fluctuating demand and likely resulting in structurally higher costs per average driver hour. Waitr’s usage of W-2 drivers also subjects the company to state-level minimum wage requirements, which a recent class action lawsuit is alleging the company systematically fails to satisfy, as Waitr does not reimburse drivers for gas and other vehicle-related expenses. If this suit ultimately requires Waitr to more appropriately reimburse delivery drivers for these expenses, the company would experience significant pressure on delivery expenses, which we do not believe it would be able to pass on to diners and restaurants. The potentially dire implications of this case appear to have been completely ignored by the investment community.

Further, Uber Eats represents a particularly potent threat:

1. Uber has the unique ability to leverage its existing drivers across both ridesharing and delivery
   1. Lower density in Waitr’s target markets mean that it is more practical and efficient for Uber to leverage ridesharing drivers for Uber Eats deliveries than it is in major metros
   2. This undermines the theoretical network effect meant to benefit the first mover in a given market, as it allows Uber to leverage an existing supply of drivers and/or attract new drivers despite lower initial order volume; Uber is essentially able to short-circuit the system
2. Uber can also cross-sell its Eats service to its large installed base of ridesharing customers
   1. Uber already owns both the installed app and the credit card information for millions of customers (many of which are in Waitr / Bite Squad geographies) providing Uber with a customer-acquisition-cost advantage

These structural factors should allow Uber to operate with a sustainably lower cost-to-serve per order and sales and marketing intensity than Waitr, which can be partially passed on to customers in the form of lower costs/lower delivery times and ultimately drive market share. This business model disadvantage vs. Uber Eats perhaps represents the crux of the idea – absent the development by Waitr of other use cases for their nascent driver / customer network, the threat Uber Eats poses could prove existential.

III. Delivery vs. marketplace dynamics appear misunderstood by sell-side analysts

Management and sell-side analysts (of which there are only three: Craig-Hallum, Benchmark Capital and Jefferies) seem to exclusively rely on EV / Revenue multiples to compare Waitr’s valuation to peers’, and on this basis the company does appears to be reasonably valued on a relative basis (notwithstanding the previously discussed competitive challenges). At its current pro forma enterprise value (incorporating share and debt issuance associated with Bite Squad transaction) of ~$845m, Waitr is trading for ~3.4x 2019 revenue vs. the average of GRUB, DHER, and JE at 5.1x (range 4.7-5.4x, per Bloomberg).

However, this methodology either fails to appreciate, or willfully ignores, the implications of comparing Waitr’s near 100% delivery model to the predominantly marketplace-driven model of these “peers”. Delivery orders have the effect of grossing up the P&L – driving more GMV, Revenue and COGS per order than a marketplace order, but a similar (at best) amount of Gross Profit, as illustrated above. By simply considering EV / Gross profit (still a flawed metric) Waitr suddenly looks much less attractive on a relative basis, trading for ~11.7x 2019 gross profit vs. an average of 9.0x for marketplace peers (range of 7.3-10.3x – note that consensus estimates do not reflect the 4Q18 expense reclassification which reduced Waitr gross margin by ~10% -- for illustrative purposes we are applying flat pro forma gross margins of ~29% to Waitr’s $250m revenue guidance). Meituan seems a relevant comp at 8.1x 2019 and 5.2x 2020 gross profit. We expect these distinctions to become more appropriately reflected over time as Waitr’s topline growth fails to translate into material operating leverage, and cash burn intensifies.

This apparent misunderstanding of the business model provides a margin of safety to the short – allowing us to establish negative exposure to the weakest player at the most expensive valuation of next year’s gross profit.

Price target derivation:

Over the near-to-medium term we expect Waitr to struggle to meet street growth expectations, and to burn increasing amounts of cash as they attempt to do so. Over the longer-term we suspect this business will struggle to ever generate sustainable FCF, and as such are hesitant to believe that there will be any material value in the equity. Given the increasing competitive challenges Waitr will face, its scale disadvantage vs. key competitors and the negligible terminal value we believe the business will generate, a material discount to the global marketplace comp set is warranted. We think a YE 2019 price target of $4.55 based on 5.0x 2020 gross profit is a reasonable near-term target.

Further, if Waitr’s unit economics deteriorate faster than expected, we believe the market may quickly come to share our terminal value concerns, and assign a much more punitive multiple, driving the stock price into the very low single digits.

Finally, if we are wrong – if the “Big 4” inexplicably decide to tuck tail and retrench from Waitr’s “underserved” markets AND Waitr finds a way to make low density markets generate strong returns AND Waitr is able to successfully expand into additional markets where it isn’t the incumbent AND the pending lawsuits just go away AND investors trust Waitr as it burns through additional cash – we see upside as relatively limited, with 9x our bull case 2020 GP implying a ~$15 stock price for ~34% upside. We believe this offers an exceptional risk-reward skew, even before accounting for the fact that we view our downside case as having a meaningfully higher probability than our upside case.

Risks:

The primary bull case (and risk to the short) is that Waitr is acquired by a strategic operator – GrubHub has been quite acquisitive, and Waitr could in theory represent an attractive way to quickly augment scale in the gulf coast region.

There are several factors which we believe mitigate this risk materially, and make it a moonshot case for bulls:

• First, both Bite Squad and Waitr have been actively shopped in the last 12 months, and strategics did not show up, suggesting limited interest
• Second, Waitr’s usage of W-2 drivers would create integration challenges and potential business risk if combined with the 1099 model of the key potential acquirors
• Third, given the speed with which competitors are expanding their geographic reach, an acquisition of Waitr wouldn’t actually bring material incremental geographic coverage for many potential acquirors, instead representing an extremely expensive way to acquire short-lived restaurant and diner customers
• Finally, Waitr would represent GrubHub’s largest transaction by far, and is trading at a premium to nearly every transaction multiple the company has paid on an EV / Revenue basis, despite the delivery mix issue previously discussed

Other relevant data points / fact patterns:

• No member of the management team has previously led a publicly traded company, and few have significant relevant experience in the consumer internet space
• The Landcadia / Waitr transaction was consummated within a month of the SPAC’s redemption deadline, with Landcadia offering to acquire Waitr after the very first meeting between the two parties, as per the proxy filings (see p. 123 here)
• The business appears to have accrued material technical debt – primary research suggests that the organization is relying on a manual dispatch system (i.e. they have not developed an algorithm to dispatch and route drivers) which creates both inferior financial performance relative to peers (less ability to scale G&A) and a worse experience for drivers and riders
  • Since inception, Waitr has cumulatively spent just $6 million on research and development. Bite Squad has spent $6.9 million. GrubHub, by comparison, spent $82 million on technology in the last 12 months alone. This leaves us skeptical that the company has developed technological infrastructure necessary to realize the increasing marginal returns on capital typically associated with rapidly growing internet-enabled marketplace businesses.
• Despite operating with materially negative FCF, Waitr’s balance sheet is in a net debt position with a $67m term loan and $60m convertible note offset by just $49m of cash. Further, covenants on Waitr’s term loan stipulate that the business maintain $15m of “Consolidated Liquidity” (defined as cash on the balance sheet plus unused revolver capacity, though the company does not have a revolving credit facility in place at this time), suggesting the company will require additional capital within the next 12 months

Catalyst

Disappointing financial results; Capital raise