Delivery Hero: Buy The Dip In This Food Delivery Leader At A Meaningful Discount

There are few consumer technology platforms I'm as bullish on as I am on Delivery Hero (ETR:DHER). That's a fairly unpopular opinion in an age where the coronavirus pandemic has decimated Delivery Hero's core business, but the company's performance throughout the pandemic shows a business that has quickly adapted to the times by leaning on delivery and slashing costs to emerge in 2021 as a more profitable company. As I sift through the numerous tech stocks that got crushed in the late February tech stock correction, Delivery Hero sits high atop my buy list. The opportunity to buy this stock at ~15% off recent highs is a very compelling proposition.

In my prior article on Delivery Hero, I wrote about a number of bullish drivers that can continue to propel Delivery Hero forward, including a 2021 recovery of rideshare and the passage of Prop 22. Flashing the slide below on Delivery Hero's TAM can help give investors a reminder of just how large Delivery Hero's market opportunity is: at present, Delivery Hero is calling its TAM at >$13.8 trillion, giving the company one of the largest addressable markets of virtually any tech stock:

To me, the pandemic was just a blip in Delivery Hero's history that will quickly pass (and in fact allowed Delivery Hero to flex its muscles in Delivery, and especially after the company's recent acquisition of Talabat, Delivery Hero Eats is poised to continue capitalizing on its separate $5 trillion market opportunity in 2021). Now, following a ~20% correction in Delivery Hero's stock price and a fourth-quarter earnings release that showed meaningful recoveries in profitability and margins, I'm more bullish than ever on Delivery Hero. Stay long here and double down if you're already invested in the stock; if not, it's a great time to enter into this food delivery leader at a meaningful discount.

Delivery has completely carried Delivery Hero in 2020, and will continue to be a pillar of strength in 2021
One specific reason justifying a continued rally in Delivery Hero has been its sheer strength in delivery this year. In fact, it was delivery that allowed Delivery Hero to maintain relatively flat y/y gross bookings despite a pandemic that has hammered the mobility business.

As you can see in the chart above, Delivery Hero saw a 130% y/y increase in delivery gross bookings, representing about two-thirds of Delivery Hero's overall gross bookings and almost fully compensating for a -50% y/y decline in mobility (rideshare) gross bookings. And in an industry that many pundits were already expecting consolidation in, recall that Delivery Hero spent $2 billion to acquire delivery rival Talabat late last year. Acquiring Talabat's customer base will give Delivery Hero Eats even more firepower and scale to counter rivals like DoorDash (DASH).

Another element that fewer investors are aware of is that Delivery Hero's delivery business has designs to expand beyond just simple takeout as well. The company clocked in an annualized gross bookings run rate of $1.5 billion for its grocery business, making it a formidable competitor to services like Instacart.


Delivery Hero also recently acquired a popular company called Drizly for $1.1 billion, making the company an instant contender in alcohol delivery. Formidable profitability resilience in a tough year

Another pandemic execution highlight that we have to give Delivery Hero a lot of credit for: the company reacted very swiftly to the pandemic, sadly letting go of 14% of its workforce in May - but this discipline allowed the company to survive and actually lay the groundwork for profitability expansion in 2021. In Delivery Hero's most recent fourth quarter, the company actually improved Adjusted EBITDA year over year:

In spite of losing half of its gross bookings, the mobility business still delivered positive adjusted EBITDA, while greater scale in the Delivery business (which was the biggest contributor to Delivery Hero's losses in FY19) helped the segment shrink its losses to one-third of the prior year. Delivery Hero has ambitious targets for profitability in its near future, which makes it a strong tech giant to bet on (unlike, as an example, Salesforce (CRM), which despite its massive scale and long tenure has rarely delivered meaningful profitability).

Long term, the company wants to deliver 25% overall company adjusted EBITDA margins (versus -23% in FY20 and -21% in FY19), with 45% margins in mobility and 30% margins in delivery.

Scale in Delivery is particularly key to helping Delivery Hero meet its profitability targets. In demonstrating that the company can turn a profit once it reaches a certain scale in key markets, Delivery Hero distinguished its 32 Delivery Hero Eats territories into "investment markets" with >150% y/y bookings growth rates and "profitable markets" with >100% y/y bookings growth rates. In these profitable markets, Delivery was actually able to squeeze out a single-digit positive adjusted EBITDA margin:

The addition of assets like Talabat and structural tailwinds in Delivery's favor (many restaurants across the U.S. remain takeout-only, and even after the pandemic passes, ordering takeout via an app has become far more mainstream now, suggesting continued growth) can help tilt scale and profitability in the right direction. Per CFO Nelson Chai's prepared remarks on the Q4 earnings call, management expects Delivery to be breakeven at a quarterly level at some point in 2021, and for Delivery Hero as a whole to deliver EBITDA profits next year:

"As we progress throughout the year, the Delivery EBITDA should improve significantly, and we remain confident in achieving breakeven at some point in 2021. Putting it all together, we expect total company gross bookings to return to year-on-year growth in Q1 despite the current COVID impacts in Mobility as Delivery continues to drive strong growth [...] We remain on track to turn the EBITDA profitable in 2021, and we are confident that Delivery Hero can deliver sustained strong top line growth as we move past the pandemic."

Key takeaways
The bullish drivers for a sustained Delivery Hero rally are numerous. Number one, the company will benefit dramatically from a recovery of rideshare and the broad re-opening of retail and offices across the U.S. Number two, the company is solidifying its leadership position in delivery with acquisitions like Talabat, Cornershop, and Drizly, and expanding into multiple categories beyond just takeout. Last but not least, the company's recent focus on profitability and message that it will soon turn generate EBITDA should generate plenty of tailwinds for the stock. Use the near-term dip as a buying opportunity.