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A Warning Sign For Unicorns Might Have Just Flashed

A Warning Sign For Unicorns Might Have Just Flashed

As Uber rushes to market and other tech companies are preparing to follow, there are signs of concern that the businesses may not be as robust as some investors hoped.

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  • CNBC recently reported that “GrubHub (NYSE: GRUB) Shares of the food delivery platform dropped more than 6% after analysts at Wedbush lowered their price target on the stock, citing growing competition in the restaurant delivery business.

    Grubhub stock is also under pressure as Uber revealed in its IPO prospectus that its takeout delivery service, Uber Eats, brought in $1.5 billion in revenue last year.

    Reuters also reported, “Uber Technologies Inc’s restaurant delivery business has grown revenue to $1.5 billion in just three years, the company disclosed in its IPO filing on Thursday, dwarfing the revenue of its profitable, and already public, rival Grubhub Inc.

    Uber also spelled out the struggle its food delivery business faces: “Cumulative payments to drivers for Uber Eats deliveries historically have exceeded the cumulative delivery fees paid by consumers,” it said.

    Uber Eats, and its rivals DoorDash and Postmates – who are also candidates for initial public offerings (IPOs) – are offering discounts and incentives to diners and restaurants in a race to grab the biggest piece of online restaurant delivery sales that investment firm William Blair & Co expects to grow to $62 billion in 2022 from around $25 billion today.

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  • Uber said its “take rate” – or the percentage of revenue it keeps from each restaurant order – declined to 10 percent after it charged high-volume restaurant partners lower fees in competitive markets like the United States and India.

    “What you like to see is take rates going up not down,” said Wedbush Securities analyst Ygal Arounian, who noted that fast-food giant McDonald’s Corp is a key Uber Eats partner.

    Research firm Edison Trends said Uber Eats does more deliveries than its U.S. rivals, including Grubhub, but that the dollar value of each transaction is the lowest of the bunch at $26.20.

    That makes it harder to turn a profit in an industry where customers, restaurants and drivers bounce between delivery services.

    Raising prices is not an option.

    “Consumers, as convenience-minded as they are, are still pretty price sensitive,” said Jesse Reyes, chief executive of J-Curve Advisors, who advises venture capital and private equity funds.

    Grubhub had established the beginnings of a profitability roadmap for the industry – even as some experts worry that it is losing share to its fast-growing Silicon Valley rivals.

    The Chicago-based company merged with rival Seamless before its April 2014 IPO and since has made more than a half-dozen other purchases, including Yelp Inc’s Eat24, campus delivery firm Tapingo Ltd and LevelUP, which manages digital ordering, payments and loyalty programs.

    It booked 2018 net income of $78.5 million on revenue of $1 billion.

    Grubhub’s U.S. restaurant partners pay an average commission rate of 20 percent. Diners are charged nothing or up to a few dollars for deliveries, spokeswoman Katie Norris said.

    The company also forged an exclusive partnership with KFC, Taco Bell and Pizza Hut owner Yum Brands Inc, which took a $200 million stake in the Grubhub.

    Experts say there will be more consolidation and failures as delivery firms look for ways to break away from the pack.

    “It’s early days in this space and there is a lot that will shake out in the next couple of years,” said Wedbush Securities analyst Arounian.

    Recent news appears to be pressuring the stock.

    GRUB daily chart

    This selling pressure follows a rally but the trend for now appears to be clearly lower.

    GRUB weekly chart

    A Trading Strategy To Benefit From Weakness

    A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.

    In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.

    Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.

    One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.

    Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.

    The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.

    bear call spread

    Source: The Options Industry Council

    While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.

    You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.

    Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

    When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

    A Bear Call Spread in GRUB

    For GRUB, we could sell a May 17 $65 call for about $4.80 and buy a May 17 $70 call for about $3.00. This trade generates a credit of $1.80, which is the difference in the amount of premium for the call that is sold and the call.

    Remember that each contract covers 100 shares, opening this position results in immediate income of $180. The credit received when the trade is opened, $180 in this case, is also the maximum potential profit on the trade.

    The maximum risk on the trade is about $320. The risk can be found by subtracting the difference in the strike prices ($500 or $5.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($180).

    This trade offers a potential return of about 56% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if GRUB is below $65 when the options expire, a likely event given the stock’s trend.

    Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, aout $320 for this trade in GRUB.

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