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3 Reasons to Buy GrubHub After Its Recent Dip

By Leo Sun - Updated May 3, 2018 at 6:44AM

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The food delivery leader still has plenty of room to run.

Shares of GrubHub (GRUB) tumbled 8% on May 1 after the food delivery company posted its first quarter earnings. The decline was surprising, since GrubHub crushed expectations across the board.

GrubHub's revenue rose 49% annually to $232.6 million, beating estimates by $3.3 million. Its non-GAAP EBITDA rose 51% to $64.1 million, topping expectations by $6.2 million, as its non-GAAP net income surged 88% to $47.2 million, or $0.52 per share -- also beating estimates by $0.13.

GrubHub's app.

Image source:GrubHub.

GrubHub's guidance for 46%-51% sales growth and 38%-52% EBITDA growth for the current quarter also matched expectations, as did its forecast for 36%-41% sales growth and 32%-42% EBITDA growth for the full year. Based on those figures, the stock isn't that expensive at 56 times this year's earnings.

The bears might be circling GrubHub after its recent pullback, but I think investors should buy -- not sell -- this high-growth stock, for three simple reasons.

1. It's the clear market leader

The bears often argue that Amazon (AMZN -0.99%), UberEats, and other rivals will eventually take down GrubHub. Yet GrubHub controlled 52% of the food delivery market (excluding pizza) last year with its network of 80,000 restaurants, according to Bloomberg, while UberEats ranked a distant second with 15%.

Amazon wasn't listed in Bloomberg's numbers, but Cowen & Co. estimated that the e-commerce giant controlled just 11% of the market last year. That's likely because Amazon charges restaurants higher fees than GrubHub and its subsidiary Seamless. The New York Post claims that Amazon charges restaurants 27.5% of each order per delivery, compared to GrubHub's 12% fee and Seamless' 24% fee.

GrubHub's growth was fueled by its acquisitions of smaller players like Yelp's (YELP -0.44%) Eat24. That takeover notably came with a five-year deal that lets Yelp users order food from listed restaurants via GrubHub.

GrubHub's active diners rose 72% annually to 15.1 million last quarter. Its "Daily Average Grubs" (food orders) climbed 35% to 436,900, while its gross food sales grew 39% to $1.2 billion. Those figures indicate that GrubHub is likely widening its lead against rivals like UberEats and Amazon.

2. Its partnership with Yum Brands

GrubHub also recently partnered with Yum Brands (YUM 0.07%) -- the parent company of KFC, Taco Bell, and Pizza Hut -- to offer pickups and deliveries from its KFC and Taco Bell stores across the US. Yum also agreed to buy $200 million of GrubHub's stock, and provide GrubHub with additional liquidity for the expansion of its US delivery network.

A piece of fried chicken.

Image source: Getty Images.

That's a win-win deal for both companies. GrubHub expands its reach in the fast food market, while Yum helps KFC and Taco Bell catch up to Pizza Hut in deliveries. The deal also strengthens both companies' defenses against McDonald's and UberEats, which forged a similar partnership last year.

During the conference call, CEO Matthew Maloney stated that "KFC and Taco Bell will start to add meaningful volume to our platform toward the end of 2018."

3. Ambitious expansion plans

Lastly, Maloney stated that GrubHub expanded into "almost 50" new markets in the first four months of 2018, and expects the company to add GrubHub Delivery to "more than 100 new markets this year," compared to the 80 markets it served at the end of 2017.

Maloney also noted that he sees "tremendous potential for online ordering in the U.S. as consumer habits shift and awareness of our product grows," and that the company remains "committed to making investments today to support long-term profitable growth."

The bottom line

GrubHub repeatedly proved the bears wrong over the past four years, and the stock more than tripled from its IPO price. But looking ahead, the global online food delivery services market could still grow at a compound annual growth rate of 32% between 2017 and 2021, according to Technavio.

If GrubHub stays at the top of this market and holds its rivals at bay, its stock could still have a lot more room to run.

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Grubhub and Yelp. The Motley Fool has a disclosure policy.

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Stocks Mentioned

GrubHub Inc. Stock Quote
GrubHub Inc.
GRUB
Yelp Inc. Stock Quote
Yelp Inc.
YELP
$38.09 (-0.44%) $0.17
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$139.41 (-0.99%) $-1.39
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$118.50 (0.07%) $0.08

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