Grubhub (NYSE:GRUB) lost more than 30% of its value over the past six months due to concerns about its slowing growth, rising expenses, and market-share losses to rivals like DoorDash and Uber Eats. A big bottom-line miss during the fourth quarter seemed to confirm those fears.

However, Grubhub's stock recently rallied after its first-quarter numbers beat analysts' estimates. Its revenue rose 39% annually to $323.8 million, beating estimates by $1.5 million. Its non-GAAP EPS fell 41% to $0.30 but still cleared expectations by a nickel. Do those better-than-expected numbers prove the bears wrong?

Someone using Grubhub's mobile app on their smartphone

Image source: Grubhub.

Breaking down the key numbers

Grubhub's core growth is measured in its "daily average Grubs" (meals), gross food sales, and active diners. In the first quarter, its year-over-year growth in daily average Grubs and gross food sales growth held steady from the fourth quarter, while its growth in active diners accelerated:

Metric

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019

Daily average Grubs YOY growth

35%

35%

37%

19%*

19%

Gross food sales YOY growth

39%

39%

40%

21%

21%

Active diners YOY growth

72%

70%

67%

22%

28%

Revenue YOY growth

49%

51%

52%

40%

39%

Data source: GrubHub quarterly reports. *22% excluding Eat24 from both periods. YOY = year-over-year.

Grubhub attributed that steady growth to its nationwide partnership with Yum! Brands (NYSE:YUM) for Taco Bell deliveries, its integration of Tapingo (the college campus delivery platform it bought last year), and the addition of new restaurants to its delivery platform.

Grubhub's integration of LevelUp (the payments and loyalty services provider it bought last year) into its delivery platform was also creating an "all-in-one" digital platform for restaurants. Clients like Just Salad, which exclusively uses the Grubhub/Level Up bundle in its 30 stores, can handle deliveries, pickups, in-store orders, loyalty points, and special offers, as well as monitor ordering trends on the platform -- which significantly widens Grubhub's moat against rivals like DoorDash and Uber Eats.

This ecosystem expansion could help Grubhub eventually compete against Square (NYSE:SQ), which recently launched a "Square for Restaurants" platform that bundles together payments, food deliveries from Caviar, restaurant management tools, and other services.

Grubhub for Restaurants running on a tablet

Image source: Grubhub.

A rising take rate and a dominant market share

Another key growth metric for food delivery services is the "take rate," or the percentage of a transaction the company retains as revenue. A higher take rate indicates that a company has better pricing power than its rivals. Grubhub reported a take rate of 21.6% during the quarter, compared to 20.9% in the fourth quarter.

That rate is significantly higher than Uber Eats' take rate of 18% in 2019, which declined annually over the past two years. DoorDash's take rate is unknown, since it hasn't opened up its books yet.

Grubhub's U.S. market share declined over the past year, but it still controlled 43% of the U.S. food-delivery market in January, according to Second Measure. DoorDash and Uber Eats controlled 31% and 26% of the market, respectively.

Moreover, the U.S. food-delivery market is still growing, which suggests that there could be room for all three market leaders to flourish. Therefore, investors should focus more on Grubhub's core growth metrics instead of market-share fluctuations.

Operating expenses are still high

Grubhub is spending a lot of money on the expansion of its logistics network, its digital ecosystem, and aggressive marketing campaigns to hold off its competitors. That spending, which caused a big earnings drop in the fourth quarter of 2018, was reined in slightly during the first quarter:

Metric

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019

GAAP net income YOY growth

74%

104%

75%

(110%)

(78%)

Non-GAAP net income YOY growth

88%

99%

72%

(47%)

(41%)

Adjusted EBITDA YOY growth

51%

61%

41%

(26%)

(21%)

Data source: GrubHub quarterly reports. YOY = year-over-year.

During the first quarter, Grubhub's total costs and expenses rose 57% annually to $314.9 million, or 97% of its revenue, compared to 86% of its revenue a year earlier. Its sales and marketing expenses jumped 61% to $78.5 million, while its operations and support expenses surged 68% to $161.4 million -- mostly due to higher order volumes.

During the conference call, CFO Adam DeWitt noted that after excluding operations and support expenses per order -- a more "reasonable way to measure" its delivery efficiency -- its revenue rose from $3.34 per order in the fourth quarter to $3.46 in the first quarter. That figure, along with Grubhub's rising take rate, indicates that it can eventually dial back its marketing expenses to improve its profitability.

The outlook and valuation

Grubhub expects its revenue to climb 31% to 42% for the full year, and for its adjusted EBITDA to rise 1% to 13%. Those growth rates mark a slowdown from its 47% sales growth and 27% adjusted EBITDA growth in 2018, but they also indicate that its business isn't headed off a cliff.

Grubhub isn't cheap at 31 times forward earnings, but Uber Eats is unprofitable, and DoorDash is reportedly only "profitable" after excluding its overhead expenses. Therefore, I believe Grubhub remains the "best in breed" play in the food-delivery market, and that the bears could be proven wrong over the long term.