GrubHub Inc's Earnings: Impressive With a Caveat

One of the year's hotter IPOs so far this year, GrubHub (NYSE: GRUB  ) , delivered solid results for its first publicly reported earnings announcement, yet the market remained ultimately unimpressed. The online ordering giant grew its fiscal first quarter sales by nearly 50% and guided above the consensus analyst estimate, so why did the stock close almost flat on the trading day? A pre-existing high valuation likely has something to do with it. The thing is, GrubHub is the industry leader in the exciting online ordering space, and it's growth isn't coming at too high a cost. This may be a rare instance of a fresh tech IPO offering investors an attractive deal.

Order up
As opposed to many a tech start-up come IPO, GrubHub came out of the gates with a net positive bottom line and twice that of analyst estimates at $0.06 per share. Sales approached  $60 million as GrubHub continues to build out and scale up, with active diners growing 50% year-over-year.

GrubHub's industry, the takeout and delivery food, is an exciting one and a perfect example of a disrupted business. The market is huge and totally fragmented, and while much of that may remain locally oriented (ie. restaurants running their own ordering and local delivery services), GrubHub's potential market is worth well into the billions per year. CEO Matt Maloney cited the penetration rate of online and mobile-based ordering at less than  5%, leaving GrubHub a long, long growth runway for its core business.

So, GrubHub fits the profile for a fundamentals-oriented growth investor. It's an easy to understand business, despite its tech undercarriage, that is already generating appealing earnings and keeping costs in check. One thing investors could worry about with this business is the cost of growth. Given that it is such a fragmented business, GrubHub's business development team must tightly manage the acquisition cost of a new restaurant. While the company doesn't provide a metric for this, there are a few ways to measure success.

Metrics to watch...
First of all, a look at top line sales growth versus sales and marketing gives a rough picture of how the company's development is faring. With revenue gains of roughly 49% and sales  and marketing growth of just 8%, it would appear that the company is getting a good return on the effort. Investors must keep in mind, though, that these are pro forma numbers. Management can exclude items at their discretion, as these are largely "assumed" figures. On a non-pro forma basis (which does not include the year-ago results of the Seamless acquisition), sales and marketing expense increased 60% while top line revenue more than doubled. Nonetheless, GrubHub's marketing appears to be yielding a solid ROI. 

Another figure to watch  is sales per active diner. In 2013's first quarter (pro forma), GrubHub booked about $15.28 per active diner. In the just-ended quarter, that figure was $15.22. As mentioned above, active diners grew by nearly 50% during that time. Again, this looks pretty good. GrubHub is growing its business quickly at both a unit level and overall, without letting the gains get eaten up by higher costs or lower customer profitability.

Is its P/E insane?—Yes, but for those looking at this stock, the usual suspect valuation metrics are not worth much weight. GrubHub is extremely well capitalized, with more  than $100 million in cash and zero debt on the books.

..and now the caveat
Another unique element to watch here, though, is the company's debt to restaurants. At the end of March, GrubHub's restaurant food payable was more than $96 million. While long-term debt is typically the most important line on the liabilities list, this significant short-term debt accounts for nearly all of GrubHub's cash pile. Going forward, this is an important and potentially unsettling factor in the way that the company reports financials.

Final Foolish thoughts
Overall, GrubHub holds a significant head start and is quickly gaining ground in the near $70 billion industry, driven by a seemingly efficient growth machine. Though not without its concerns, the company is one of the more compelling IPOs in recent months. Growth-lovers, keep an eye out.

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