Lately, Grubhub (GRUB) has been serving up nothing but indigestion to investors. Saying profit growth will slow considerably over the next year, the once-hot food delivery company has watched its stock price get sliced nearly in half since its peak last September.
The stock whipsawed in response to its fourth-quarter earnings report the first week of February. Management guided for an increase of just around 7% this year in adjusted EBITDA, its preferred bottom-line metric, forecasting a range of $235 million to $265 million.
Management also said it will continue to invest in marketing and opening new Grubhub Delivery markets, through which the company provides delivery service in addition to the ordering and payment platform, and it believes top-line growth will remain strong, projecting a revenue increase of 30.6% to 40.5% in 2019.
Image source: Grubhub.
However, what didn't come up in the earnings report or the subsequent conference call was the apparent threat from Uber, whose competing UberEats service has been growing rapidly and taking share from Grubhub. According to research firm Second Measure, as of last April, UberEats was quickly gaining on Grubhub and even took the lead in 15 of the country's 40 largest markets. In El Paso, Texas, and Jacksonville, Florida, UberEats went from virtually zero market share to a majority in six months. UberEats also passed Grubhub in Charlotte, San Antonio, and Oklahoma City.
At that time, Grubhub still commanded about 50% of the domestic market, according to Second Measure, but more recent data indicates that UberEats has continued to gain share from Grubhub. UberEats is targeting $1 billion in revenue this year, equivalent to what Grubhub took in last year. According to Wedbush, Grubhub's market share fell from more than 50% in 2016 to just 34% last year, while UberEats' share jumped from 3% to 24%, and it sees the two companies owning essentially equivalent pieces of the market by next year.
Check out the latest Grubhubearnings call transcript.
The Uber problem
Against that backdrop, it's easy to see why Grubhub is stepping up investments in marketing, expansion, and delivery, and is willing to sacrifice profits in the near term.
Like Amazon.com, Uber is a competitor you don't want to have. The company is well capitalized, focused on the long term, and willing to sacrifice profits for market share. The company also has a well-known brand thanks to its ride-hailing app, which is its primary business, and that gives it a competitive advantage in food delivery, since it already has a built-in network of delivery drivers.
UberEats has already forged partnerships with fast-food heavyweights McDonald's and Starbucks, much in the way Grubhub has done with Yum! Brands and Jack in the Box. Uber, which is putting up massive losses because of the unprofitable ride-hailing business, sees food delivery as a potential profit center, in part because of how well Grubhub is doing.
Time to sell?
Uber is angling for an IPO this year that could value the company at as much as $120 billion, which will give it even more capital to play with. The smaller delivery service Postmates has also just filed for an IPO, indicating that competition in the industry is likely to intensify.
However, Grubhub's top-line guidance shows that it still sees considerable growth ahead, so even though UberEats is taking market share, the overall market is expanding much more quickly. Grubhub also continues to believe that paper menus and offline ordering are its biggest competition, and that they represent the growth opportunity in the industry. The company believes that market to be worth $200 billion and continues to grab share in the overall restaurant takeout market.
Therefore, while the UberEats story line deserves attention, it doesn't seem as if investors should jump ship just yet. Every one of Grubhub's key metrics, including daily orders, gross food sales, and active diners, is growing briskly, thanks to organic growth and acquisitions alike -- showing that the company is moving in the right direction. It continues to expand to new cities and restaurants, and it now partners with over 105,000 restaurants in more than 2,000 U.S. cities and in London.
While Grubhub's bottom line may get pinched in the near term, investing in a stronger position for the long term is the right move. Grubhub investors should keep an eye on UberEats, but with the stock price already cut in half, that threat looks sufficiently priced in.
