Domino’s: Uber Eats Deal Looks Intriguing but Not Transformational; Maintain $385 Fair Value

Wide-moat Domino’s DPZ has announced a partnership with narrow-moat Uber UBER to offer the pizza chain’s fare to Uber Eats customers globally. With our assessment that customer overlap between delivery aggregators and the value-oriented chain is limited, in tandem with Uber Eats’ relatively small share of food delivery in the firm’s largest U.S. markets (23% in February of this year, according to Statista data), we don’t expect the decision to prove transformational, and consequently don’t expect to move our $385 fair value estimate meaningfully. Shares shot up roughly 11% in intraday trading on July 12, bringing the stock, which has long been our top restaurant pick, into a range we’d consider fairly valued.

The deal marks a sharp turnabout from Domino’s longtime resistance to aggregator platforms, though a commitment to own-delivery and order tracking through its website should result in a very similar customer experience. This does mean that the tie-up won’t increase Domino’s throughput capacity, but suggests that the value of incremental delivery orders and access to aggregator-loyal clientele may outweigh the risk of cannibalization. This comes as third-party marketplaces have grown increasingly relevant and as delivery penetration has become a mainstay in the quick-service restaurant space, reaching 18% of sales in 2022, per Euromonitor. We expect that outperformance to wane over the next half decade, with Euromonitor projections suggesting U.S. delivery market growth (3.2% annual) should fall short of our aggregate restaurant industry growth forecast (4.1%) after a COVID-19-induced surge, exacerbated by consumers shifting toward cheaper fulfillment channels amid economic pressure.

We continue to remain cautious on the U.S. restaurant space in aggregate, with declining traffic and increasing evidence of check management suggesting that market expectations for near-term results look too aggressive.