Why Domino's, Not Google, Is the Biggest Winner in the US Stock Market Since 2004

Domino's is no "freak stock." Its growth rests on a nimble, fast-moving market strategy, and on the $700 billion scale of the US restaurant industry. Next to drug companies and tech companies, a business you can see and eat may be an alternative, smaller kind of "value investing" opportunity.

If you could go back to the United States of 2004, and — like investors in China — you had a shot at subscribing to a hot new IPO, which one would you pick?

That year 171 companies listed on America's two main markets. Five of them drew heavy attention, each with subscriptions above $1.5 billion — and Google's $1.7 billion fundraising plan ranked only fourth among them.

But like everyone else that year, you would surely have noticed Google, and you would have kept watching it for years afterward. Before the dot-com bubble burst, plenty of tech companies had rushed onto the US market, and by 2004 most of them were in poor shape. Google held steady. As the most important internet company and the emblem of high technology, it delivered: measured to today, its shares have returned more than 16 times the original investment.

But if you were the sort who wanted to put in a little money and make a killing on the stock market, there was a better stock for you that year — one that, in hindsight, has done even better: Domino's.

Word that the company planned to go public had been circulating for two years. Anyone who read the prospectus, though, might have broken into a cold sweat over this delivery-pizza chain: same-store sales had all but stopped growing, and more than half of the $137 million raised in the IPO would go to paying down debt. On top of that, McDonald's and Yum! Brands, two restaurant giants, were already entrenched in the market. "It's hard to say whether Domino's can satisfy investors' hunger for a high-growth stock," Bloomberg Businessweek wrote of the IPO at the time.

Today, counting dividends and stock splits, Domino's has returned as much as 27 times the original investment.

Even if you had come in years later — starting in 2010, when Domino's results were dismal — its growth would still have outpaced tech stocks like Apple, Google, Facebook and Amazon. By the calculations of Quartz reporter Chase Purdy, Domino's stock has risen more than 20-fold since 2010, while Amazon, the best performer of the group over the same stretch, managed only a little more than fivefold.

Comparing Domino's with companies like Google and Amazon isn't entirely fair — even after all that climbing, Domino's market cap still hasn't reached $9 billion, which is arguably an advantage of being small.

Even inside the restaurant industry, a string of more valuable companies — McDonald's, Starbucks, Yum! Brands — sit ahead of it. Domino's, meanwhile, lived through a financial crisis and then hit a performance low in 2010. Some people said its pizza tasted like "cardboard smeared with ketchup," not worth buying at all. Even Patrick Doyle, who took over as CEO, admitted in public: "Yeah, we sucked."

So why is Domino's the one still laughing?

Fast Food, Delivery and Digital: Domino's Grew by Reading the Industry's Future Correctly

Nearly a quarter of what Americans eat outside the home comes from the fast-food market, where efficiency and value for money matter most. But next to burgers, fries and fried chicken, pizza is not a particularly good business to start in fast food: low prices mean thin dine-in margins; chasing a variety of toppings and flavors pushes costs up; teenagers love it, but they switch to other fast-food brands as they get older; and, most important of all, you have to get the pizza in front of the customer while it is hot, because the taste suffers badly once it cools.

These are also the reasons why Pizza Hut, Papa John's and other pizza chains had a bumpy time expanding around the world for a long stretch. Domino's, though, found a different market back when it was running its very first dine-in store: 80% of that store's revenue came from delivery orders placed by young men who didn't want to leave the couch during a live sports broadcast.

Once the internet took off, restaurant ordering and delivery produced several companies worth more than $10 billion — Meituan, Ele.me, Grubhub — and even Uber made it a separate new business. But in the second half of the 20th century, when Domino's was making its name, the promise of "delivered in 30 minutes or it's free" was met entirely by the company's own logistics and delivery team.

Skipping dine-in service and focusing on delivery let Domino's expand its store network through the cheaper franchise model. Franchise sites were also picked by a single rule: they had to be able to deliver to most of the surrounding neighborhood within 10 minutes. And with order data flowing back to headquarters from every store, the company could forecast demand for its various ingredients better, which made it easier for its central kitchens to ship stores half-finished pizzas closer to what they actually needed.

Domino's is also the American fast-food brand keenest on tying digital experiments to brand marketing. In 2007, when Americans still ordered delivery by phone, Domino's online ordering already covered both PC and mobile; by 2016, 60% of its orders came from digital devices. Then came personalized customization, ordering by emoji, a "stomach translator," hookups with every sort of smart device, drone and robot delivery... it is hard to judge how much these high-tech stunts actually accomplished, but every new gadget could certainly be turned into a nice round of marketing exposure.

Talk About the Youth Market, but Count What Young People Can Spend

Domino's saw and seized the shift to digital and to younger customers earlier than most, but its growth never left behind the cheap, calorie-dense, unrefined character of American fast food. After a wave of "fast casual" restaurants emphasizing health, taste and experience took off, the market broadly decided that Domino's rivals were no longer just McDonald's and Pizza Hut but Shake Shack and Chipotle as well.

Shake Shack, which listed on the NYSE with only 60-odd burger locations, made a huge noise at the time. Looking back, the company's confidence may have owed something to consumers' herd instinct and curiosity, and to Wall Street analysts' personal fondness for the brand. After several quarters of slowing growth, Shake Shack's stock has long traded below its offering price.

By comparison, Chipotle — which also preaches "slow food, served fast" — built its advantage on operating efficiency, and that has made its growth steadier: the best-performing Chipotle stores serve 300 customers in an hour, at an average check of more than $9. That puts each store's relative value at around $9 million, more than three times a McDonald's.

Much as Whole Foods once caught fire, more and more people came to believe the kind of restaurant Chipotle represents would hit traditional fast food harder in the years ahead — health-oriented, made fresh, closer to what young people prefer, and able to keep generating selling points in the market.

So they were already hurrying to find "the next Chipotle." In 2012 and 2014, Chipotle's growth really was higher. But compare the two and you find that, with the fallout from Chipotle's 2015 food-poisoning outbreak still with it, its stock has risen only about tenfold, while Domino's rose nearly 30-fold over the same period.

Young people's love for these brands may be genuine enough. Once you account for what they can actually spend, though, it is hard to say how big this market really is.

As we've noted before, compare the finances of Americans born around the Second World War — the "Baby Boomers" — with those of "Millennials" now in their twenties and thirties, and the younger group earns 20% less a year on average. Add up bank balances, trust funds, cars, property and the rest, and Millennials' net worth of $29,530 is 56% below the Boomers' — calling them the broke generation would be no exaggeration.

When we discussed Domino's customers above, we also mentioned that its fans are concentrated among teenagers — more precisely, nearly half of Americans develop a strong appetite for pizza during their school years, between the ages of 6 and 19. For one thing, pizza can refuel them after a class sports session or fill the break in a group study session; for another, their pocket money doesn't stretch to pricier organic food.

But the Restaurant Business, Which Anyone Can Understand, Has Always Been One of America's Favorite Places to Invest

"On restaurant stocks, the US market seems gripped by a back-to-basics speculative fever," MarketWatch reporter Anora Mahmudova remarked in 2015, after studying a cluster of small and mid-sized restaurant brands that had gone public around the same time.

In those years every newly listed restaurant company's stock ran hot, especially on its first day of trading. Ipreo, a firm that specializes in IPO research, once published a figure: of the 12 restaurant companies that went public between 2012 and 2015, not one closed down on its first day, and the average first-day gain was 48%, far above the 15.3% average for the IPO market as a whole. Habit Restaurants, Potbelly and Noodles & Co. all doubled on their opening day.

The market was keen on restaurant stocks with fast revenue growth, rapid expansion and high gross margins, and people in the business felt the whole industry had climbed out of the trough of the 2008 crisis. The Restaurant Performance Index, which combines same-store sales, customer traffic, labor and capital spending, shows that the US restaurant industry spent nearly three-quarters of the past decade in an optimistic period of expansion and growth.

Small restaurant companies like Shake Shack have in fact found it hard to keep results growing fast enough to sustain investors' early enthusiasm, and at one point fell more than 10% in a single day. Overall, though, restaurant stocks that listed over the past decade still beat the IPO market as a whole, with a combined price gain of 54.7%.

Compared with biotech and technology companies, whose growth can be just as strong, investing in restaurants requires no complicated jargon or concepts. The questions are usually simple: can the brand standardize production, run to a consistent set of rules, and manage and expand as a chain; does its food have broad appeal, or something of its own? Even an ordinary person can finish their own "due diligence" by eating there a few times.

America's well-developed food industry, in turn, gave these growth-hungry restaurant companies the support they needed. Frozen-food technology, which matured from the Second World War onward, assembly lines for half-finished food, and the franchise model that McDonald's, KFC and others carried to its full extent all greatly improved the restaurant supply chain and pushed the industry — fast food above all — forward. Apart from Starbucks, all five of America's most valuable restaurant companies today come out of fast food.

Domino's, with a market cap of only $9 billion, still can't squeeze into that group.

Even in "Value Investing," the Things You Can See, Touch and Use Every Day Win Out

Before restaurant companies like Domino's, Chipotle and Starbucks produced growth curves that improved year after year, investors liked trading restaurant stocks for quick gains but never really believed they could keep growing well — under the "value investing" rules Warren Buffett follows, restaurants and packaged food should in theory find it hard to build a "moat" against fierce competition, because it costs a customer so little to defect.

Of the stocks Buffett himself loves, only Coca-Cola has anything to do with food and drink. As he tells it, Coca-Cola's appeal lies in a brand that keeps delivering the idea of "happiness," and in the powerful distribution and marketing that keep reinforcing that brand. That is the kind of "moat" he accepts.

But a "moat" is not only about the competitive edge a company gets from its brand, its channels or its technical barriers; it is also about your relationship with these brands. On Buffett's list of holdings, from Disney, Coca-Cola and Gillette (which became part of Procter & Gamble after it was acquired) to American Airlines and IBM, nearly all are companies that ordinary consumers talk about constantly and buy from all the time.

The more people whose most basic daily needs a company can keep meeting, the more likely it is to become a great company.

In earlier decades the textbook case for this idea was Walmart. With low prices and rapid expansion, Walmart and American consumers together created the abundant demand of the late 20th century, and the company's revenue and profit shot up: from 1971 to 2006, Walmart's average annual sales growth topped 30%, and its annual profit growth peaked at 119%. Walmart began over-the-counter trading on the NYSE in 1970; 100 shares bought in that year's IPO, after steady gains and 11 stock splits, would have been worth as much as $2.6 million by the time Sam Walton died in 1992 — a gain of more than 1,500 times.

These days, though, people talk more about Amazon.

In many ways Amazon resembles Walmart. Both gradually widened their range of goods, meeting demand for books, music and video, clothing, household goods, toys and everything else on a single site. Both make money in similar ways too: bargaining with suppliers to push costs down, and using precise recommendation systems to raise the size of each order and keep customers loyal.

After 2000, though, Amazon was no longer merely a retailer; it was increasingly seen as a technology company. In 2006 it put forward the idea of "cloud computing" ahead of Google, Microsoft, Oracle and a string of other tech companies, and used a growing list of large clients to prove that this new business, which had nothing to do with e-commerce, could become the next source of growth to carry the company's future.

When Amazon first disclosed its cloud computing revenue in 2015, Jeff Bezos called it "a fast-growing, $5 billion business." The market turned out to be bigger than he predicted: by 2016 the cloud business brought in $12.26 billion, and within two years the company's share price had nearly doubled.

By 2017 that was still enough for the financial magazine Barron's to call Amazon the tech stock most worth buying that year. Citing analysis from the investment bank Evercore ISI, the magazine noted that the scale of Amazon's users and infrastructure lets it consider more and wider uses for data and computing power — and that is the room this company keeps leaving for the imagination.

Just as the retail business Walmart stood for once displaced steel, energy and automobile manufacturing stocks, the high-market-cap leaders of the US market today are tech stocks: Google, Apple, Amazon, Facebook. Going public a few years after founding, even on the strength of outside funding, has let them grow to billion- and even ten-billion-dollar market caps faster than the companies of decades ago.

In the end, though, none of them has outgrown that red-and-blue delivery pizza box that always reaches your door within 30 minutes. And if you only started buying stocks in the 2000s, what would have been wrong with choosing Domino's, Starbucks or Chipotle — newly listed at the time, and tied to your basic daily need to eat and drink? What they stand for may be another kind of "value investing" opportunity: a lower barrier to entry, a shorter horizon, and mid-term returns that look every bit as good.

Graphics: Feng Xiuxia

Cover image from Domino's official website, YouTube and Pexels