Cabot’s “Next Amazon” and “why it could jump 50% on earnings”

by Travis Johnson, Stock Gumshoe | February 14, 2018 4:50 pm

What's being hinted at by Cabot Growth Investor?

Time for another look at a growth stock being teased by Cabot[1] — this time, it’s a pitch for Cabot Growth Investor[2] ($99/yr) from Mike Cintolo[3], and he’s following in the footsteps of a great many folks in predicting “The Next Amazon.”

And who could blame you for being interested in that, right? Amazon has been a ludicrously successful investment for 20 years, and we’d all like to be able to go back in time and buy some shares of that little bookseller in the late 1990s. Those “you missed it” pitches are common, and always tempting — Cabot often references the “next Tesla” or the “next Priceline” or whatever similarly tantalizing growth stock you didn’t invest in early, and it does get you to thinking about those 10,000% gains that early investors enjoyed.

Which is the point, of course — once they’ve got you daydreaming about wealth, you’re halfway to pulling out your credit card. Now all they need is a secret or a catalyst to push you over the edge.

This time, it’s both — they say the stock “could jump 50% on earnings” and, of course, that this secret little company will only be revealed to Cabot Growth Investor subscribers (“Free,” of course, because technically this is probably a “free report” that you get as a bonus along with your paid subscription… and like many of the lower-priced newsletters, they do offer refunds and a trial period).

So what hints do we get? Enough to ID the stock? Here’s more from the ad:

“It’s already growing its earnings 29% faster than Amazon and has outperformed it by 155% over the past two years.

“… it could jump 50% on earnings and double soon after that.”

OK, so that helps to narrow it down. What does this company do?

“Ironically, few people saw the huge potential in Amazon in the beginning. But you can do yourself (and your grandchildren) a favor by investing in the next Amazon.

“That’s why I’m writing: to tell you about another company that’s revolutionizing the delivery service in the food industry….

“This company created a strong mobile platform that allows users to get the delivery of their favorite meals.”

OK, so more of that “you missed out, here’s your second chance” excitement — but food delivery, that certainly shrinks the field. Any other clues?

“I’m not the only one who sees this company becoming the next Amazon. Wall Street’s top institutional investors do too, owning millions of shares worth close to $1 billion.”

So that’s another one of those hints that doesn’t really mean anything — “institutional investors” own the vast majority of almost every single stock in the market, both the successful ones and the duds. You’ll see the same major investment banks and asset manages at the top of the list of holders of almost every company, so that kind of info only really gets meaningful when there are outliers — big investors that you specifically think have the best analysis or track record who are big buyers, that kind of thing. All this really tells us is that this is at least a billion-dollar company.

Another clue?

“Over the past year this small company has started to zoom past Amazon in earnings growth (35% vs. 6%) and where it counts the most: investor profits (363% vs. 142% in the last two years).”

So who is this? Well, the numbers don’t match up very precisely with the data in the systems I’m using, so that means we have to leave some room for the possibility that the Thinkolator could be wrong in this case… but there’s really only one relatively high-profile meal delivery company that trades in the US, so odds are awfully good that the Thinkolator is accurate in telling us this must be… GrubHub (GRUB)[4].

GrubHub is a mostly app-based delivery platform for restaurants — they got their start back in the mid-2000s by offering up just a technology platform to let restaurants accept takeout orders online, but have grown to offer up more services to their restaurant clients, including actual fulfillment of deliveries in their core markets. They earn their money with both delivery charges that might be passed on to customers, and with a fee paid by the restaurant that’s sort of similar to a sales commission (their drivers seem to be like Uber[5] drivers — independent contractors who deliver on their own schedule).

And the timing of the next earnings is quite a ways off… because they just announced their Q4 earnings, and they were fantastic, delighting investors. They reported accelerating revenue growth and beat analyst expectations, and also announced a big partnership with Yum! Brands (YUM)[6], which invested $200 million in GRUB and will be pushing GRUB’s service out to more of its restaurants.

So either Cabot Growth Investor made this recommendation before earnings, and they just hadn’t gotten a chance to email out the “teaser pitch” yet (it did come in via email from Cabot today, and it’s the first time I’ve received this pitch from them), or they are, as is fairly typical of Cabot and Navellier and the other momentum growth followers, jumping on that success and betting that it is a portent of more success to come.

As often is the case, on average — companies that do well tend to keep doing well. That’s why momentum investing and growth investing works much of the time — it’s just that these kinds of companies can quickly get scary if the growth slows, since the stock valuation is premised on that continuing rapid growth in both sales and earnings and the current earnings are little solace if the future expectations are reset.

GRUB is profitable, but trades at about 85X trailing earnings… that’s OK while it’s growing earnings at close to 300% year over year, and with the current growth expectations GRUB is trading at 43X 2019 earnings and 33% 2020 earnings, so you can make a case for the stock if you’re comfortable with that growth projection — it’s still got a pretty high PEG ratio of 2.3, which is a bit above the comfort zone, but it’s not ludicrous (that’s taking the forward PE in the mid-40s and dividing it by the expected “next five years” growth rate of about 20%).

The good thing about GRUB, offsetting the high valuation of the shares, is the potential for very strong scalability — it’s a tough business, offering door to door logistics support, but the core software offering of the ordering app becomes more valuable the more people use it… and customers (the restaurants) become “sticky” and don’t get tempted away by the other restaurant delivery services because they know GrubHub works and makes their diners happy.

There’s a network effect that helps to support the “one winner” hypothesis in this market, much the way there’s one big winner in online retail and one big winner in social networking, but, of course, that obscures the huge amount of competition that’s happening under the surface — so that competitive pressure from other startups is probably the biggest threat, and given GRUB’s status as the strongest survivor of a challenging decade, and with the cash infusion and huge network of KFC and Taco Bell restaurants fulfilling GrubHub delivery and pickup orders, it might be hard for anyone else to build to scale in time to compete.

Who are the competitors? The only real comparable is the UK firm Just Eat (JE in London, JSTTY OTC in the US), it’s a similar size and has profitable businesses in the UK, Brazil[7], Australia[8] and other countries, and is also trying to aggressively expand, but there are also lots and lots of startups that are pretty well-financed — names like Postmates, Seamless, Maple, Deliveroo, Foodora, Foodpanda, most of them are not publicly traded but you’ve probably heard of some of these if you live in a large city (Delivery Hero is public, went public in Germany at DHER last year and has a big investment from Naspers). GRUB has been dragged down by worries about competitors in the past, and even a few years ago the CEO was pretty clear [9]that competitors both big and small, including Uber and Amazon, didn’t faze him — partly because being good at fulfillment in this niche business is hard and expensive.

So… will it work out for GrubHub? I confess to never having used their service, but I do admire their management’s ability to survive for almost 15 years at building a business in what is typically a very low-margin and competitive space… my concern would be cost containment as they try to provide a more Amazon-like fulfillment service, using more of their own drivers and spending heavily, but the core business of ordering software and payments and associated services appears to be pretty solid.

You’ll have to make your own call on whether it’s worth $8 billion, but I can see why investors have been excited about the KFC/Taco Bell news, and that big earnings beat likely had more analysts upgrading their forecasts, which often helps to keep the ride going… though it could also be that the huge short position in the shares is helping to fuel the stock run as some shorts have to cover their positions in a short squeeze (though short positions remain high, which can be both fuel for future gains and a reason to worry about fundamentals). Unless we have a market crash, the stock will probably react largely to their ability to keep top-line growth growing rapidly — growth stocks don’t generally fall apart just because they’re “too expensive,” usually some sort of news has to change the direction of the tide.

And I’ll leave you, as always, to make your own call — want to order some GRUB, or cook at home? Let us know with a comment below.

Disclosure: I own shares of Amazon. I do not own any other company mentioned above, and won’t trade in any covered stock for at least three days following publication, per Stock Gumshoe’s trading rules.

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