It's earnings season on Wall Street, and just yesterday, online fast-food ordering service GrubHub (GRUB) gave investors what (you would think) they wanted: a big beat on both revenue and earnings. Instead of bidding the stock up, however, investors bid GrubHub down, and in a big way -- to the tune of 13%.
Wall Street, however, believes that sell-off was a mistake. According to data from ratings reporter TheFly.com, no fewer than three separate analysts are chiming in today with encouraging notes about GrubHub's prospects. Granted, these views may be colored by the fact that the stock has done so very well this year -- up 60% even after Wednesday's sell-off. But as Wall Street argues, there's plenty of reason to expect the stock to recover from that disaster, and resume its upwards march.
Is Wall Street right about that? Here are three things you need to know.
1. Roth Capital loves GrubHub
Let's start with the actual upgrade. This morning, analysts at Roth Capital (CAPS rating: 74.86) announced they are upgrading GrubHub stock to buy in response to Wednesday's results. Sales in Q3 soared 44% year over year, with "active diners" growing only 19%. Thus, not only is GrubHub growing its client base, but existing customers are using it more and more often to order food. Profits per diluted share nearly doubled to $0.15 per share.
Roth interprets this as proof of "platform stickiness" at GrubHub. So while management guided toward tighter profit margins in Q4, ultimately, Roth believes such stickiness will result in fatter "EBITDA" (i.e., profit) margins per order.
2. Canaccord likes it, too
Our second vote of confidence in GrubHub today comes from Canaccord (CAPS rating: 64.44), which according to TheFly was impressed at the "better than expected" results Wednesday, which exceeded even GrubHub's own lofty expectations. In line with Roth's comments, Canaccord believes that "the company's technology improvements will continue product optimization, leading to better engagement and conversion and move the company toward its long-term vision of an increased addressable market."
3. And don't forget JMP
Last but not least, JMP Securities (CAPS rating: 85.91) chimed in today with an exhortation to investors to buy GrubHub shares on "any further weakness." Currently, GrubHub stock sells for just $38 and change after its sell-off. But JMP argues that the stock is worth at least $47 a share, and will outperform the market over the coming year.
If JMP is right about that, it should work out to a 23% profit for new buyers today.
The most important thing: Valuation
But is JMP right about that? Are Roth and Canaccord right as well? Well, that depends on how you look at the numbers.
Last quarter, GrubHub grew its earnings 87.5% year over year to $0.15 per share. It's hard to find a P/E ratio that can't be rationalized to look reasonable by an 87.5% growth rate. Problem is, GrubHub probably won't be able to maintain that growth rate for long. In fact, according to data from S&P Global Market Intelligence, the consensus on Wall Street -- even among GrubHub's supporters -- is that over the next five years, the company's growth rate will slow down, and average only about 22% annualized.
Currently, the stock sells for 68.4 times earnings which, when divided by the growth rate, works out to a PEG ratio north of 3.0 -- pricey to say the least. Granted, this P/E and PEG ratio don't take into account the fact that GrubHub is more profitable than its income statement suggests. Free cash flow at the company -- $75.2 million for the past 12 months -- results in a price-to-free-cash-flow ratio of only "only" 43. But that's still nearly twice the 22% projected percentage rate of profits growth.
When you get right down to it, the best I can say about GrubHub's valuation right now is that the stock is no obvious bargain. And the worst: It still looks severely overpriced to me today, even after its sell-off.