Article Highlights:
- The food-delivery industry is shifting, and Big Tech is losing ground to smaller, more innovative companies.
- An emotion-based technical indicator proves this uptrend is just beginning.
- Three trades from the restaurant sector are set to explode higher — allowing you to profit.
Amazon is a giant. The company almost killed bookstores. It’s one of the biggest players in online ads. It also has a large presence in audiobooks (Audible), shoes (Zappos), movie trivia (IMDb) and other areas.
But Amazon won’t dominate food delivery.
Amazon Restaurants, the company’s attempt to compete against Uber Eats, Grubhub and DoorDash, is shutting down this month.
Soon, the remaining food-delivery players may also change their plans. That’s because both restaurants and consumers are questioning the value of these Big Tech-powered services.
Now, revenue from home delivery should add $13.4 billion to restaurant sales this year. While restaurants like this number, the cost of sales, however, is a concern.
Reports indicate that Uber Eats charges a restaurant 30% of its menu prices for deliveries. So, on a $20 pizza, the restaurant may net $14. Since profit margins are often less than 10% for restaurants, they lose money by partnering with Uber Eats.
Competitors like Grubhub and DoorDash are equally expensive.
And consumers see the costs as well. Fees can add significantly to the cost of their food.
These costs are contributing to a downtrend in the stocks of food-delivery companies. However, I see three smaller-company stocks that could benefit from this reversal…
Restaurants Fight Back
To combat the cost of doing business with Big Tech, restaurants are seeking alternative approaches — and they’re doing so by taking advantage of technology that’s already available.
Uber is an app that connects people wanting rides with those wanting to make money driving. That’s a simple concept. And more importantly, the technology is simple to copy.
It’s also not very expensive. An app providing on-demand services might cost $100,000. The cost of developing an app can be covered with about $330,000 worth of sales for a restaurant.
Costs of app development are lower for restaurants if they split the fee. If 10 restaurants join forces, they break even with about $33,000 in sales.
That math is appealing in a low-margin industry. So, it’s not a surprise to see that restaurants are joining forces to share the relatively low cost of app development so that they can offer a more affordable service to consumers.
In such a way, local delivery services are gaining popularity and outcompeting Big Tech services.
In south Florida, Delivery Dudes is on the rise. In Iowa, Chomp delivers food. In northern Colorado, it’s Nosh. The name varies, but the service is the same for consumers. More importantly, it’s a cheaper option for restaurants — and that’s bad news for tech-driven food-delivery companies.
Watch my video below to learn more.
The Delivery Trends Are in the Charts
Smart investors are already detecting a downtrend in the stocks of these food-delivery giants.
As you can see in the chart below, Grubhub fell more than 57% in nine months. Traders are selling ahead of disappointing results.
Grubhub Fell 57% in 9 Months
Now, this trend away from Big Tech to small tech benefits some restaurants you should know about — including Del Taco Restaurants Inc. (Nasdaq: TACO).
This company partners with local delivery companies and could see a similar boost.
What’s great about TACO is that it offers value. It trades at a discount to the restaurant industry on several fundamental metrics such as the price-to-book ratio, the price-to-sales ratio and the price-to-earnings growth ratio.
Wingstop Inc. (Nasdaq: WING) is another trade possibility. Cash flow from operations grew 30% last year. That lets WING finance growth while maintaining its small dividend.
And there’s one more profit opportunity…
Use My VIX Flip Indicator to Spot Wins
Fiesta Restaurant Group Inc. (Nasdaq: FRGI) franchises Pollo Tropical and Taco Cabana.
FRGI is beaten down. But my VIX flip indicator in the chart below shows that an uptrend is starting.
FRGI Is on the Rise
The VIX flip indicator is designed to catch changes in traders’ emotions.
It acts like the CBOE Volatility Index (VIX), a popular indicator that’s also known as the fear index.
Fear rises in a downtrend, and the VIX and VIX flip go up as that happens. When my indicator flips below its moving average, it indicates that prices should rise as fear subsides. If it flips above, it means prices will drop as fear rises.
Fear is falling in FRGI. It could benefit further from its strong fundamentals. Importantly to us, it could benefit further from a shift away from Big Tech to small-tech solutions, which favor smaller restaurants that offer food that travels well in local markets.
Like many new companies, Big-Tech delivery services are losing money. Consumers aren’t willing to pay enough for venture capital investors to profit from the services.
This creates a local opportunity for small tech to displace Big Tech.
The best investments to benefit from food delivery are in trades like TACO, WING and FRGI, which run restaurants in the business of delivering food you can eat on your couch.
Regards,
Michael Carr, CMT, CFTe
Editor, Peak Velocity Trader