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Grubhub Inc: 3 Reasons to Buy, 3 Reasons to Sell

By Leo Sun – Feb 9, 2017 at 6:34PM

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Can the red-hot food delivery stock continue rallying this year?

Shares of GrubHub (GRUB) slipped more than 3% on Feb. 8 after the food delivery company posted mixed fourth quarter earnings. Revenue rose 38% annually to $137.5 million, narrowly beating expectations by $0.2 million.

Unfortunately, GrubHub's non-GAAP net income rose just 19% annually to $16.7 million, or $0.23 per share, missing Wall Street estimates by two cents. Its GAAP-adjusted net income rose 21% annually to $13.6 million, or $0.16 per share.

Grubhub's mobile app.

Image source: Grubhub.

For investors who aren't familiar with GrubHub, the company is the top online delivery and takeout ordering marketplace in the country. Its portfolio includes GrubHub, Seamless, LAbite, Restaurants on the Run, DiningIn, and Delivered Dish. The company works with over 50,000 restaurant partners in over 1,100 U.S. cities and London.

Despite its post-earnings swoon, shares of GrubHub remain up almost 90% over the past 12 months. To figure out where GrubHub is headed this year, let's discuss three reasons to buy and three reasons to sell this hot stock.

Three reasons to buy Grubhub

  • GrubHub's active diners (unique accounts which ordered within the past 12 months) rose 21% annually to 8.17 million last quarter. That represents an acceleration from its 19% growth in the third quarter.

  • GrubHub's daily average grubs (orders) also rose 21% annually to 274,800, compared to 26% growth in the third quarter. GrubHub now serves daily active grubs in 22 markets, compared to just seven at the time of its IPO in 2014. Those increased orders boosted its gross food sales by 33% to $735 million, which exceeded the company's prior target of $500 million for the year.

  • GrubHub also posted solid guidance. It expects its first quarter revenue to rise 32%-39%, and its full-year revenue to grow 26%-34%. On the bottom line, Grubhub expects its EBITDA to rise 14%-30% for the first quarter, and 14%-31% for the full year. All those figures matched analyst expectations.

Three reasons to sell Grubhub

  • First and foremost, Amazon's (AMZN -3.01%) restaurant delivery service, which is free for Prime members, represents a growing threat to GrubHub. Amazon launched the service in late 2015, and it has since expanded to 19 major cities across the U.S. Last June, research firm CIRP claimed that Amazon's Prime user base in the U.S. had grown 43% annually to 63 million. As Amazon strengthens the bonds between Prime Now deliveries, Echo speakers, and the rest of its ecosystem, GrubHub's service could be marginalized.

  • To counter Amazon and other rivals in the crowded food delivery market, GrubHub plans to spend more money on tech, sales, and marketing. During the quarter, it hired about 40 engineers and analytics experts from Zoomer to boost the efficiency of its driver network efficiency, and it plans to boost its sales and marketing spend by over 20% this year. Those moves will weigh down its margins, which had been gradually improving since its IPO.

GRUB Operating Margin (TTM) Chart

Source: YCharts

  • That bottom line pressure is troubling, because GrubHub's valuation is pretty lofty. Analysts expect Grubhub's non-GAAP earnings to grow 26% this year, but that isn't high enough to justify its trailing P/E of 75, which is much higher than the industry average of 50 for internet information providers. GrubHub's forward P/E of 35 looks cheaper, but it merely matches its projected growth rate for the year.

The verdict: Avoid Grubhub for now

GrubHub has been a solid growth stock over the past year, but its rising expenses, slowing bottom line growth, valuations, and vulnerability to Amazon indicate that it has more downside potential than upside potential. Therefore, I think GrubHub might go higher, but the risks outweigh the rewards at current prices.

Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.

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