Uber Technologies (NYSE: UBER) has apparently made an offer to acquire major UberEats competitor Grubhub (NYSE: GRUB).
Wall Street loves the deal, as both companies’ stock price soared, but this consolidation of power in the take-out delivery business is far riskier than it appears.
After Bloomberg broke the news that Uber had made an offer for Grubhub, it sent GRUB more than 20% higher, while UBER stock was up 4%. This is a valid confirmation from the market that investors believe the rideshare giant is making the right decision in choosing this moment to pounce on its biggest competitor.
Looking at GRUB’s stock chart, it certainly appears that Uber is getting a good price, as their rival once traded for $150 a share and currently trades around $60 even after today’s announcement.
Throw into the mix the boost their Grubhub has received during the coronavirus lockdown, and you can see why Uber thinks it’s a perfect time to consolidate power.
The problem is, it’s really not.
Uber Technologies posted a massive loss this year in Q1, some $2.9 billion, and is also slashing its staff by 14%. It doesn’t take a rocket scientist to figure out that they need to find a way, like Amazon did, to forge profitable side businesses to help them mature as a company while cash burn remains so high.
For this reason, it is unsurprising to see them targeting UberEats, their most “profitable” endeavor, as a spin-off that needs protection by absorbing its biggest rival.
Here’s where it gets tricky, as the fastest-growing food delivery business is neither of these two. It’s DoorDash. Meanwhile, Postmates are spamming ads with Martha Stewart on Youtube, Instagram, and anywhere else they can.
This is such a saturated space that Uber looks delusional that it believes it can corner the market.
Much like the biggest-flaw with its rideshare business is that there is no customer loyalty, the delivery business is the same game. Uber drivers and riders utilize multiple apps to ensure they are busy/getting the best deal.
It seems like a big shot in the dark to hope you could ever completely dominate a business that every pizza place has offered for half a century.
What happens if restaurants decide the costs associated with using these apps aren’t justified anymore and resort to delivering their own food again? Grubhub already loses money, so does UberEats. Could they survive on thinner margins if they were forced to cut fees and still drive growth? Almost certainly not given their level of cash burn.
Ultimately, it’s hard to see why Uber wants to spend big to bring another money-losing company under its wing.
The rideshare giant may one day find a cash cow it can leverage into funding its self-driving aspirations, but Grubhub isn’t going to be it.
With everyone ordering food from home during the coronavirus lockdown, food delivery has never looked so systemically important.
Unfortunately, when the pandemic is over, the premium will be priced out of GRUB, and Uber will be forced to realize that there is nothing people hate more than paying $15 for a Subway sandwich.
Disclaimer: The author holds no positions in Grubhub (NYSE: GRUB) or Uber (NYSE: UBER) at the time of writing. The article should not be considered investment advice from CCN.
This article was edited by Samburaj Das.