McDonald’s share price: do AI acquisitions signal tasty returns?

McDonald’s [MCD] share price has gained 19% this year. Will the global fast food giant’s acquisition of Silicon Valley-based artificial intelligence start-up Apprente further boost performance?

The purchase of Apprente, which is aimed at automating its drive-thru operations, is a clear indication of a more tech-focused direction for McDonald’s.

Apprente’s voice-based, conversational technology, “will allow for faster, simpler and more accurate ordering”, McDonald’s said on Tuesday. 

The Big Mac seller added that Apprente’s technology could also be incorporated into mobile ordering and self-order kiosks. 

At the end of trading without disclosing the deal’s financial terms, McDonald’s shares were down 0.11% to $209.45.

Burgers and fries with extra tech

The acquisition will see McDonald’s expand its presence in Silicon Valley – not by opening more outlets to feed the area’s hungry tech workers, but by directly employing those “with PhDs in machine learning and computational linguistics”.

Does the greater focus on technology suggest that McDonald’s stock, which has a market value of around $160bn, can keep offering strong returns? In very simple terms, the hope is that adopting automated and machine-learning technologies will help McDonald’s to boost sales.

Fast-food companies “are Wall Street favourites for good reasons, especially the huge, steadily growing profits generated by the market leaders”, according to The Motley Fool contributor Demitrios Kalogeropoulos. “In addition, a significant portion of those earnings is up for grabs each year as upstart rivals with innovative menus and selling strategies jostle for market share.”

This fierce competition is a major factor in the other technology-focused investments McDonald’s has made this year. 

“A significant portion of those earnings is up for grabs each year as upstart rivals with innovative menus and selling strategies jostle for market share” - The Motley Fool contributor Demitrios Kalogeropoulos

In March it acquired Dynamic Yield, which has created personalisation and decision-logic technology to “provide an even more personalised customer experience by varying outdoor digital drive-thru menu displays to show food based on time of day, weather, current restaurant traffic and trending menu items”.

It is now deployed in over 8,000 US restaurants and should be integrated into nearly all US and Australian drive-thrus by the end of 2019.

A Plexure to serve you

After the Dynamic deal McDonald’s invested in Plexure, a mobile app vendor, to enhance the development of its global customer app.

If these recent moves along with staying ahead of the curve by introducing new products and branding initiatives, lead to automating McDonald’s drive-thru and mobile ordering operations at most of its 37,000 restaurants in 120 countries, the potential benefits for the company’s bottom line could easily help it maintain its dominant industry position.

When considering that successful fast-food businesses “can generate high, sustainable profits through a wide range of economic conditions”, it pays to look at their key metrics and risks, Kalogeropoulos added. 

So, how do McDonald’s numbers look?

McDonald's share price, Yahoo finance, 12 September 2019

Solid Q2 results

In July, McDonald’s reported solid second-quarter results, with better-than-expected same-store sales growth of 6.5% and quarterly revenue of $5.34bn, up 3% from a year earlier. It had adjusted earnings per share of $2.05, up by 3% year-on-year, with the strong US dollar weighing on growth, according to The Wall Street Journal.

McDonald’s paid out $2bn to shareholders through dividends and buybacks during the second quarter, Hargreaves Lansdown analyst Nicholas Hyett said, while noting that operating margins have risen from 31.2% to 43%. The shares have outperformed the S&P 500 so far this year.

“The shares change hands for 25.4 times expected earnings, a sizeable premium to the longer-term average of 18.3. That lofty rating puts the pressure on the group to deliver, and investors shouldn't take anything for granted. Competition across the casual dining industry is intense, and politicians the world over are increasingly focused on diet and lifestyle choices,” Hyett added.

But if slower global economic growth, Brexit and the US-China trade war end up pushing advanced nations into recession and damage McDonald’s earnings, then its shares will look far less tasty.