GREAT Write up!
Record Revenue And Profitability - Waitr Holdings Is A Strong Buy
Aug. 14, 2020 7:35 PM ET|60 comments | About: Waitr Holdings Inc. (WTRH), Includes: AMZN, GRUB, UBER, WMT
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Summary
Waitr Q2 quarterly revenue reached a record $60.5 million and marked a turn to profitability with Net Income of $10.7 million.
Despite the recent run on the stock price, it still has a 85%-280%+ upside potential as shown in three separate valuation methods.
The food delivery sector is going though consolidation, and we explore the reasons that Waitr is a hot acquisition target.
Introduction
In this article, I explain the reasons why Waitr Holdings (NASDAQ:WTRH) is a Strong Buy and briefly review the short history from the 2018 IPO until today. A number of valuations are explored by comparing a number of multiples to peers in the industry. An alignment of EV/Revenue multiple, produces a conservative price target of $7.8. On the other end of the spectrum, 40x annualised EBITDA from the last quarter produces an optimistic price target of $16. Valuation against revenue multiples is also explored producing roughly an $11 target share price. Moreover, recent developments are presented, so that readers can draw their own conclusions with respect to the likelihood of an imminent buyout.
In order to explore why the multiples are so suppressed and why there is an opportunity for their expansion, the journey from IPO until the most recent quarterly results is reviewed.
Waitr Background
Waitr started as a food delivery app by founder Chris Meaux in Louisiana. It spread across the southern states before getting acquired by Landcadia Holdings in 2018 in a deal worth $302 Million.
Following the IPO, Waitr acquired Bite Squad for $321 million. This was the start of its cash woes by adding a considerable debt load to the balance sheet, in order to finance the deal. It only got worse with the subsequent cash burn that ensued. The decision to directly employ drivers as Waitr employees weighed on their cash flow. It was an unconventional approach for an industry that operates on a contractor model.
Source: May 2019 Waitr Investor Presentation
In hindsight, the announcement contained in the above slide in May 2019 was a poor decision. Chris Meaux stepped down in August 2019, and Chief Operations officer Adam Price took over until the end of the year, during which the value of Bite Squad acquisition was written off.
The Great Turnaround with Carl Grimstad
Carl Grimstad has been the latest CEO to join the company from January 3rd, 2020. In a recent interview to foodondemandnews, he described the dire situation in which he found the company:
We were over-staffed, we were paying a lot of our vendors incorrectly or too much, our service offering was mispriced, we had a driver model that could never work, and we had a dwindling cash position and a capital structure-meaning $120 million in debt in front of equity that had no value-and were coming off a very big negative EBITDA year
Despite the situation, the focus on improving revenue per order, cost per order, cash flow and profitability started to show some early signs of success. February 2020 was the first profitable month for the company, and on the latest Q2 earnings, Waitr reported a cash position of $87 million. Carl's turnaround efforts seem to be paying off, with Waitr going from cash burn, to profitability in Q2 2020. This is a remarkable achievement, given the short time frame in which it was pulled off. The cost reduction efforts included:
Changing delivery pricing to industry standards
Converting W-2 drivers back to 1099 contractors
Appointing key people to oversee key concerns.
The challenge is now sustainable growth, while maintaining profitability. They're attempting this by entrenching themselves as the market leader in the areas of their current dominance. Their niche has been their focus on the so called tier 2/tier 3 geographies that are sparsely populated. Penetrating sparsely populated areas presents a bigger challenge compared to urban centers, as the distances needed to be covered per order are larger. At the same time, these areas also face less competition. Waitr appears to have found the formula to success, offering the right incentives to drivers to cover the areas and now increasing the density of their offering. This provides Waitr with both a moat and a compelling selection of restaurants and groceries that puts them in a position to start luring people from the neighbouring tier 1 geographies of the bigger cities. A couple of current examples include the push in Houston and Sarasota where they are hiring contract drivers. This is part of a series of announcements in the local press that totals more than 6,000 drivers since July this year across their area of operations.
Valuation Against Competition
1. Enterprise Value/Revenue
At the close of Thursday August 13th, 2020, with a share price of $4.21, we can calculate an Enterprise Value of roughly $440 million. Trailing 4 quarter revenues amount to $197.5 million which give us an EV/Revenue multiple of 2.23
Waitr Uber Grubhub JustEat Takaway.com
Enterprise Value/Revenue 2.23 4.14 4.42 7.09
If this multiple were to rise towards the lower-end of its peers, similar to Uber (UBER) at 4.14, it would require an EV of $819 million, equating to $7.8 target price per share. This is the most conservative measure of valuation.
2. Revenue multiple for acquisition
The consolidation headlines in the industry so far have included:
Takeaway.com acquiring JustEat for $7.8 billion in January 2020
Takeaway/Justeat acquired Grubhub for $7.3 billion in June 2020
Not to be outdone, Uber, which was originally in the run for Grubhub, acquired Postmates for $2.65 billion.
The revenue multiples for the above deals are presented below:
Postmates Grubhub Justeat
Deal size (Million $) 2650 7300 7800
Revenue (Million $) 400 1351.36 1200
Revenue Multiple 6.62 5.4 6.5
Applying those multiples on trailing 4 quarter revenues of $197.05 Million produces the following share prices.
Waitr Market Cap (Million $) 1305 1064 1281
Waitr Share price ($) 11.87 9.68 11.64
This gives us an average target share price of $11.06.
3. EBITDA Multiple
Finally, on the valuation front, if we annualised the latest EBITDA figure of $0.1 EPS, we would get $0.4 per share. Applying a 30x - 40x EBITDA multiple would yield a share price of $12 - $16.
It's clear that multiples are suppressed compared to peers in the industry. Waitr needs to demonstrate that it can sustain its execution and profitability for another quarter or two, which would lead to the anticipated multiple expansion presented above.
Technical Analysis
Drawing the Fibonacci retracement levels from the all-time high to the all time low helps identify critical long term support/resistance levels. The stock price recently stalled and got rejected at the 38.2% retracement level of $5.88 after having seen a run-up in prices. The pullback was necessary, allowing technical indicators to cool-off, with the current price levels presenting an excellent risk/reward entry opportunity for new investors.
The graph is currently shaping up to be a major Cup and Handle formation, that, on a successful breakout of $5.88, could end up targeting the 61.8% Fibonacci level of $9.39.
Source: Author's analysis with data from TradingView
The graph includes revenues and EBITDA from IPO until the latest quarter that help illustrate the standout nature of the most recent results.
The following complete what's an already bullish picture:
Waitr prepaid $10.5 million in debt in exchange for a rate decrease of 200 basis points for 1 year. It also received an extension of the maturity date 1 year to November 15, 2023, on both its credit facility and convertible notes.
The At-The-Money offering that had been suppressing the stock price has been completed as of July 10th.
As of June 30, 2020, cash on hand was approximately $66 million, and one short month later, on July 30th, it stood at $87.3 million. This is a robust 32% increase of cash balance on a single month.
The caveat is that the company needs to demonstrate that the last quarter wasn't a one-time wonder, and it can continue to execute on that path. From trading at an all time high on 16th November 2018, followed by being priced for bankruptcy one short year later, it would seem quite fitting if it managed to reclaim its all time high this November, reflecting the turnaround that's currently underway.
What could interrupt a steady ascent is the possibility of a buyout, especially in light of the recent consolidation in the industry.
Buyout Speculation
This paragraph relies heavily on speculation. Nevertheless, facts are presented for the reader to draw their own conclusions.
There is one company that stands out, by currently having the right people in place both at Waitr and on their side, so as to facilitate an alignment of operations in the lead-up to a potential buyout. The leading speculative suitor appears to be Delivery Hero, and the reasons are down to the key people listed below:
Jonathan Green
Jonathan Green is on the board of directors of Waitr. As such, it would be expected that he receives his Reserved Stock Units (RSUs) as compensation. That's how Waitr pays its board of directors. All other board members have received their RSUs this year, but a cursory search through the SEC filings shows that Jonathan Green hasn't. This leads us to wonder why? After all, we wouldn't expect him to offer his services free of charge.
The reason for this can be explained by the possibility of a conflict of interest. Jonathan Green is partner at Luxur Capital Group who reported a 9.99% stake in Waitr during May according to a sec filing. At the same time, Luxur has a 5% stake in Delivery Hero as stated on the Delivery Hero shareholder structure. Furthermore, Luxur Capital Group helped raise the capital to finance Delivery Hero all the way back in 2014.
Given the stake in both Delivery Hero and Waitr, Luxur would have knowledge of both sides of the conversations. One could even see the possibility that someone, partner level at Luxur, would be in position to help broker a deal between the two parties. There is a strong case for this line of thought given the close connections on both sides. Therefore, if there has been a letter of intent to purchase Waitr by Delivery Hero, it could present a conflict of interest for Jonathan Green to receive his RSUs.
Mats Diedrichsen
In early June, Waitr announced that Mats Diedrichsen joined as an adviser. Mats' previous employment according to his LinkedIn is Chief Marketing Officer at Delivery Hero
Source: LinkedIn
Arthur Maas
Yet another person appears to be advising both Delivery Hero and Waitr, this time ex Just-Eat Chief Product & Technology Officer.
Source: LinkedIn
Two former high level executives, could help bridge the operational gap between the companies and even align their IT systems, long before an acquisition materialises. They also act as an introduction and communication bridge between Waitr and Delivery Hero with their contacts in both companies.
Jeanette Gorgas
Jeanette Gorgas from New York has been elected into the Delivery Hero supervisory board as the chair of the strategy committee. One has to wonder, why would the strategy committee be headed by someone with US experience. Could it be that Delivery Hero, have their eyes set out on a US launch?
Source: Delivery Hero Website
Thomas Pritchard
Thomas Pritchard, an M&A expert, joins Waitr:
Thomas C. Pritchard, General Counsel of Waitr, has been engaged in the private practice of law for over 35 years, with extensive experience in advising public and private corporations and individuals engaged in a variety of financial and business transactions, including merger and acquisition transactions, private and public offerings of debt and equity securities, Securities and Exchange Commission regulatory compliance, board and special committee representation, and a wide variety of business advice. Mr. Pritchard holds a Juris Doctor from Southern Methodist University School of Law and a Bachelor of Arts from Northwestern University.
Other bidders
Despite the links between the companies listed above, there could be other motivated players in the industry that would want a stake in a growing company like Waitr. Walmart (WMT) could accelerate its Walmart+ roll-out in the geographies served by Waitr. The relationship would be mutually beneficial. Walmart has the capital to fuel Waitr's growth and Waitr has demonstrated that it can operate successful, same day, local deliveries. Walmart has announced a pilot program with Instacart, but it's unlikely that they would rely on a single provider for such an important product for them. The stakes are high to build a service that will rival Amazon's (AMZN) Prime delivery. They will need to cover all geographies and make use of the relative strength that different players demonstrate.
In a bid in this direction, Waitr have been increasing their grocery menu selection since their announcement in the Q1 report. More recently, there are menu's popping up with 'Back to school' items such as the one in Birmingham and Lake Charles.
Other motivated players in the industry include Uber, with their recent acquisition of PostMates and even DoorDash, which could use Waitr as a way to reverse merge and become listed on the US Stock Market.
Uber has seen a big shift towards delivery over mobility in the last quarter with delivery representing 68% of their revenue.
Source: CNBC
Lyft (LYFT) could arguably see value in following in Uber's trail by diversifying their business into delivery.
Finally, there are the big players such as Amazon (AMZN) that could be interested. The latest news came out of the UK where the watchdog granted them approval for their 16% stake in Deliveroo.
There is also Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and whether they want to become more active in food ordering - It remains to be seen what their appetite would be for a head start at launching a delivery SAAS in the US and beating Amazon to the punch.
The number of available acquisition targets in the US market has dwindled now that Grubhub and Postmates are off the market. Waitr stands out as a hot acquisition target now that it's able to demonstrate an ability to execute successfully in tier 2/3 markets.
Summary
Waitr has demonstrated they execute well in their niche, and while they don't have a great market share across the whole of the US, they dominate their geographies to the tune of 2 million active diners.
Valuation
Despite chances of a bankruptcy fading, multiples to peers have remained suppressed on a number of measures. As confidence in execution returns, multiple expansion provides significant upwards potential:
EV/revenue would value Waitr at $7.8
Peer revenue multiple: $11.06
EBITDA multiple: $12 - $16
Acquisition Speculation
There are signs that Delivery Hero is getting ready to acquire Waitr. These include:
Jonathan Green, Luxur Partner, not receiving RSUs. This could be due to conflict of interest, given the stake Luxur has in Waitr and Delivery Hero.
Two separate people with links to delivery hero advising Waitr and one of them advising both Waitr and Delivery Hero.
Jeanette Gorgas, from the USA, now a strategy adviser on Delivery Hero.
Thomas Pritchard, an M&A specialist joins Waitr.
Whilst this is speculative, as the saying goes, there's no smoke without a fire. Drawing conclusions on the above is left as an exercise to the reader.
Regardless of whether any acquisition rumours materialise or not, there is plenty of organic upside potential as illustrated earlier. Whilst any investment decision comes with risk and there can be no guarantee of future performance, this article explored the reasons why the stock could appreciate to double digits, concluding that Waitr Holdings is a "Strong Buy" from current levels.
Disclosure: I am/we are long WTRH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
