In late March, McDonald’s (NYSE:MCD) acquired Dynamic Yield for $300 million, which, a company with a market value of nearly $150 billion, this may seem like lunch money. Yet the deal is actually the biggest since the end of 1999 when it bought Boston Market and MCD stock was about $46 a share.
The Israeli startup is the kind of company that would actually be interesting to a tech operator like Alphabet (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT) or Facebook (NASDAQ:FB). Founded in 2011, the firm is focused on developing sophisticated artificial intelligence (AI) models to personalize customer interactions across the web, mobile apps and email. It has a database of more than 600 million users.
So why is McDonalds buying this company? What is the fit here? Well, I think the deal is spot on — and should be driver for MCD stock.
Last year the company initiated a pilot program using Digital Yield’s technology for its drive thru service (this represents a majority of revenue). It leveraged information on traffic, the time of day and weather — just to name a few items — to dynamically change the digital signage to gin up more sales.
Yes, it seems like Digital Yield passed the test with flying colors. In fact, McDonalds also researched 30 other companies in the space.
For the most part, it looks like the company is aggressively rolling out the technology. In the latest earnings call, CEO Steve Easterbrook noted that 700 drive thrus already have the system in place. “Over time, using data from the millions of customers that we serve daily, the technology will get smarter and smarter through machine learning,” he said.
The company is also exploring interesting uses for Dynamic Yield. For example, image recognition of license plates and geofencing of mobile apps could provide even more advanced personalization.
But the deal is more than just cutting-edge technology. Consider that Dynamic Yield has a strong group of data scientists, software engineers and AI experts. No doubt, this kind of talent is tough to attract, especially for a traditional company.
Yet might Dynamic Yield get stifled? It’s true that this is always a risk when a traditional company acquires a start up. But it does appear that McDonald’s is managing things the right way. Dynamic Yield will remain independent and continue to sell its technology to other companies, which should help keep up the innovation. The company has more than 600 clients, including the Hallmark Channel, IKEA and Sephora.
But the deal for Dynamic Yield is definitely not a one-off. The good news for McDonald’s stock holders is that the company has made it a major priority to focus on innovation. To this end, it has partnered with Plexure for its mobile platform, which includes apps and in-store kiosks. McDonald’s has taken a 9.9% equity position in the company.
Then there is the deal with Uber, which allows for delivery services. Consider that the business is now at $3 billion.
Bottom Line for McDonald’s Stock
For McDonald’s, AI will likely go beyond marketing. The technology could prove helpful for the supply chain, such as in terms of improving efficiencies. Even small gains can have a material impact because of the company’s massive scale.
Granted, McDonald’s stock is pricey, with the price-to-earnings multiple at nearly 26x. But then again, a premium is well deserved. The company has remained fairly reliable, with 15-consecutive increases of global comparable sales.
And finally, the heavy investments in technology will certainly help guard the company against disruption. But more important, AI has the potential for being transformative — and keeping up the growth that fuels MCD stock.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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