Check out the latest Grubhub earnings call transcript.
Shares of Grubhub (GRUB +0.00%) sank about 40% over the past 12 months, mainly due to concerns about tougher competitors, rising expenses, and unsustainable valuations. The marketwide sell-off that torpedoed many high-flying growth stocks exacerbated that pain.
However, most analysts who cover Grubhub remain either bullish or neutral on the stock. Fifteen analysts still rate it as a buy, one rates it as overweight, 12 rate it as a hold, and only one rates it as a sell. The average price target is still at $115, which represents a near-50% gain from current levels.
Image source: Grubhub.
Investors should always be skeptical of analysts' ratings and do their homework. However, Grubhub clearly remains a battleground stock for the bulls and bears, with compelling arguments on both sides.
What the bulls believe
Grubhub is the biggest food delivery service provider in the U.S. It expanded over the years by merging with Seamless and acquiring smaller rivals, including MenuPages, Allmenus, DiningIn, Delivered Dish, LAbite, Yelp's Eat24, and Tapingo. It also secured delivery deals with fast-food giants like Yum Brands.
That expansion enabled Grubhub to control about 34% of the U.S. food deliveries market last year according to Edison Trends. Uber Eats ranked second with a 28% share, followed by DoorDash at 18%, Postmates at 12%, and a 4% share for Square's (SQ +2.43%) Caviar. The bulls will also note that Grubhub's growth (buoyed by acquisitions) accelerated significantly over the past year.
|
Q3 2017 |
Q4 2017 |
Q1 2018 |
Q2 2018 |
Q3 2018 | |
|---|---|---|---|---|---|
|
Daily Average Grubs |
14% |
34% |
35% |
35% |
37% |
|
Gross Food Sales |
18% |
39% |
39% |
39% |
40% |
|
Active Diners |
28% |
77% |
72% |
70% |
67% |
|
Revenue |
32% |
49% |
49% |
51% |
52% |
Year-over-year growth. Source: GrubHub quarterly reports.
The bulls believe that Grubhub can grow in two main ways. First, it can lock in restaurants and expand its digital ecosystem by integrating additional services, like LevelUp's payment and loyalty services, into its all-in-one Grubhub for Restaurants platform. That move, which mirrors Square's introduction of Square for Restaurants last year, would boost its average revenue per restaurant, give it a fresh stream of services revenue, and widen its moat.
Second, the bulls believe that Grubhub can leverage its first mover's advantage and brand recognition to tether more restaurants to its platform. Credit Suisse analyst Stephen Ju recently noted that Grubhub only has a "meaningful presence" in six of the top 20 restaurant chains in the U.S., which gives it plenty of room for growth.
Image source: Grubhub.
What the bears believe
The bears will point out that Grubhub's market share has been declining (down from about 50% in the beginning of 2018) as its rivals have gained ground. Uber Eats reportedly expanded its coverage of the U.S. market from 50% to 70% by the end of last year, and signed partnerships with fast-food giants like McDonald's. DoorDash also secured a similar deal with Wendy's.
To maintain its lead, Grubhub must spend more cash on acquisitions, marketing, and logistics. That's why it expects its adjusted EBITDA to decline 12% to 30% annually during the fourth quarter, which marks an abrupt end to its impressive bottom line growth over the past year:
|
Q3 2017 |
Q4 2017 |
Q1 2018 |
Q2 2018 |
Q3 2018 | |
|---|---|---|---|---|---|
|
GAAP net income |
(1%) |
293% |
74% |
104% |
75% |
|
Non-GAAP net income |
23% |
68% |
88% |
99% |
72% |
|
Adjusted EBITDA |
21% |
45% |
51% |
61% |
41% |
Year-over-year growth. Source: GrubHub quarterly reports.
The bears believe that this decline, which will mostly be caused by an incremental $20 million to $30 million in marketing and logistics investments during the fourth quarter, indicates that Grubhub's earnings will deteriorate as it tries to fend off a growing number of rivals.
Citi analyst Mark May recently put Grubhub on a 30-day negative catalyst watch list, citing near-term margin pressures and competitive challenges. Morgan Stanley analyst Brian Nowak also cut his EBITDA estimates for fiscal 2019 and 2020 due to logistics investments and acquisitions.
Lastly, there's the troubling matter of Grubhub's insider sales. Over the past 12 months, Grubhub's insiders sold over 400,000 shares on the open market and didn't buy a single share. This tells us two things: Insiders don't think that Grubhub's earnings growth will improve anytime soon, and that the stock is potentially overvalued at seven times this year's sales.
Why I still believe in Grubhub
I think competition is certainly an issue for Grubhub, but there could still be plenty of room for all these food delivery services to thrive without stepping on each other's toes. Grubhub's market share may decline, but it could still keep generating double-digit sales growth for the foreseeable future.
With an enterprise value of about $7 billion, Grubhub also remains a compelling takeover target for larger tech companies that want to quickly dominate the food delivery market. The most likely suitor would be Amazon, which failed to kill Grubhub with its own food delivery services.
Grubhub faces some short-term headwinds, but I think its long-term prospects remain solid.
