Berenberg downgraded its rating on Just Eat [JE] shares from “buy” to “hold” on Tuesday and slashed its target price to a below-average 600p from 880p, citing the threat of aggressive competition from Uber [UBER] and Amazon-backed [AMZN] Deliveroo.
Deliveroo’s and UberEats’ willingness to put market share before earnings risked throwing a spanner in the “winner-takes-it-all” narrative that had once propelled Just Eat’s share gains, Berenberg said, with the stock now a “risky investment”.
A wave of downgrades
But Just Eat’s shares proved mostly resilient to Berenberg’s downgrade. After dropping by as much as 4.4.% to 608p in early trading on Tuesday, it closed up 1.2% on Wednesday at 644p.
Berenberg’s downgrade is the latest in a wave of bearish views on Just Eat over the past two months. In early May, JP Morgan Cazenove downgraded the stock from “overweight” to “underweight”, citing slowing earnings growth in the UK, which accounts for mostly all of the company’s profits, despite efforts to widen its geographical reach. Berenberg noted the company’s “high exposure to less attractive restaurants, cannibalisation from delivery restaurants (finally) signed up on [its] platform and poor tech execution versus peers”.
Competition from cash-rich rivals
Later in May, the announcement that Amazon was injecting $575m into Deliveroo – a deal currently under scrutiny by the UK’s Competition and Markets Authority (CMA) – knocked off over 8% from Just Eat’s share price. In mid-June, UBS downgraded the stock to “neutral” from “buy” and cut its price target from 870p to 650p.
“Three surprises drive our more cautious view: negative trends for [the] UK brand perception, a re-acceleration of UK share loss and worrying search trends in many markets,” the Swiss bank said. “Our main concern is that [Just Eat] is not investing enough at a time when capital is flowing into the industry and customer acquisition costs are rising.”
“Our main concern is that [Just Eat] is not investing enough at a time when capital is flowing into the industry and customer acquisition costs are rising” - analysts at UBS
Meanwhile, Just Eat remains in search of a permanent CEO. Growing discontent from shareholders, who have seen the value of their holding drop by almost 25% over the past year and a half, led to the exit of previous CEO Peter Plumb in January after only 16 months in the role. Since then, Peter Duffy has been serving as interim CEO. In March, Duffy said did not want the top job.
Some brokers remain sanguine amid the stiff competition in the food delivery sector. Last week, RBC Capital Markets named Just Eat its “top pick”, saying the stock would undergo a re-rate as momentum materialises from Q2 onwards. It also forecast non-UK markets to account for 35% of earnings before interest, tax, amortisation and depreciation (EBITDA) within three years, compared to 5% today. It stuck a 900p price target on Just Eat’s shares.
Liberum is also on the bull bandwagon. Analysts at the brokerage downplayed the impact of Amazon’s planned investment in Deliveroo, taking solace in Just Eat’s vastly greater market share and its strong advantage in rural areas.
|PE ratio (TTM)||51.98|
|Quarterly Revenue Growth (YoY)||40.50%|
Just Eat share price vitals, Yahoo Finance, 15 July 2019
Divestiture or takeover?
Bears see intrinsic value in Just Eat’s assets. A divestiture could unlock value and make the company’s shares desirable again, Berenberg said, noting Just Eat’s 33% stake in Brazil’s iFood. However, it questioned “whether Just Eat's board will approve the disposal of its best assets during the investment phase” that will be required in the face of higher competition.
Just Eat’s shares trade at a trailing 12-month price-to-earnings ratio of 53, compared to 131 for US peer GrubHub. At current levels, several analysts have mentioned the risk of a takeover. Indeed, activist investor Cat Rock has pushed for either a merger or sale to the Netherlands’ Takeaway.com [TKWY], in which it also holds a stake.
For now, those who can truly savour their Just Eat investments are short sellers: short interest on the stock broke above a record 8% a week ago, with current levels just below that.