Shortseller Jim Chanos (Trades, Portfolio) made a name for himself by being one of the first people to publicly bet against Enron in the early 2000s. Since then, he has taken other high-profile short side positions, most notably against Tesla (TSLA, Financial).
In an interview with CNBC, Chanos explained why he is bearish on food delivery company Grubhub (GRUB, Financial) and why he doesn’t think it can be a profitable business.
Profitless prosperity
Chanos doesn’t believe that the "gig economy" business model can ever be profitable. This is why he is also bearish on Uber (UBER). When it comes to Grubhub, he says it already employs an "almost predatory" business model by charging independent restaurants a large percentage of the price of an order for delivery. According to Grubhub, they don’t make money delivering for large chains like McDonald’s and Burger King, so they overcharge smaller restaurants.
He furthermore believes that if Grubhub is not profitable in the first half of this year, with so many people relying on home deliveries, then they will probably never make any money. He doesn’t think that it will turn a profit even if delivery becomes more widespread, people don’t want to go out as much and restaurant capacity shrinks:
“Here’s the conundrum with that question. If you don’t make any money delivering for the big chains, which is where a lot of the volume is, and you don’t make any money delivering for the independent restaurants and independent restaurants survive [the lockdowns], why would they ultimately not do this themselves, and just pay an agency fee? Why do they need to give up 20% of the take to a third party. This has been profitless prosperity for restaurants in good times.
And it doesn’t scale! Delivery guys can only do two deliveries an hour. It’s not like other Silicon Valley network effect companies, it’s literally a body shop - you have to have more drivers to do deliveries. And that’s the inherent problem with why this is never going to be profitable.”
This last problem is, in my opinion, the most important one for Grubhub. The business is currently viewed as a high-tech business with almost infinite growth potential, and that increasing revenues will eventually make up for the losses. However, Grubhub is not a tech business but a "tech-adjacent" business, so there is a case of inaccurate classification here.
Disclosure: The author owns no stocks mentioned.
Read more here:
- The Value Investor's Handbook: Share Dilution
- Seth Klarman: How Much Research and Analysis are Sufficient?
- The Value Investor's Handbook: Be Approximately Right, Not Precisely Wrong
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