Grubhub (NYSE:GRUB) stock has fallen more than 50% since last September, and after slumping through 2019, it now trades at a 52-week low.

Shares of the food-delivery specialist have gotten shellacked -- the company's profits have fallen as competition has stolen market share. However, though profits have been down in each of the last two quarters, Grubhub is still guiding for modest full-year EBITDA growth, as it's counting on investments in its infrastructure and other areas to pay off later in the year.

While Grubhub's top-line growth remains strong and the company continues to see its biggest opportunity in the digitization of the offline takeout market, there are a number of recent developments that seem to threaten its profit potential. As competitors like Uber (NYSE:UBER), DoorDash, Postmates, and even Amazon (NASDAQ:AMZN) angle for growth in the industry, food delivery is starting to seem more like ride-sharing, an industry that promises significant growth but is essentially a commodity business. Since Grubhub lacks competitive advantages, it's going to have a difficult time generating profits.

Let's take a closer look.

A phone with the Grubhub app open

Image source: Grubhub.

Competition is a problem

Grubhub has steadily lost market share. According to Edison Trends, the company had a 26.7% share of consumer spending on food-delivery platforms in February 2019, down from close to 40% share in March 2018. That compared to 27.6% for DoorDash, now the leader according to that estimate, and 25.2% for Uber Eats.

Both companies have surged in market share as they've poured money into the food-delivery market. Uber spent hundreds of millions on driver incentives to grow Uber Eats last year, while Softbank led a $535 million funding round for DoorDash last year, which the company promptly used to expand from 600 cities to 3,000, ramping up marketing, hiring, and restaurant partnerships. Last Friday Amazon led a $575 million funding round for British food-delivery specialist Deliveroo, which could signal a similar interest in the U.S. market.

What all of these companies have in common is a focus on market share rather than profit. Amazon and Uber are well known for their preference for top-line growth over short-term profits. Uber lost more than $3.7 billion last year before taxes and investment gains, and the company expects its take rate, or the percentage it records as adjusted revenue from gross bookings, to decline as it grows Uber Eats, taking on lower-fee restaurants and expanding to more competitive geographies. It also said, "cumulative payments to Drivers for Uber Eats deliveries historically have exceeded the cumulative delivery fees paid by consumers," meaning it relies on restaurants, or itself, to subsidize delivery costs. This appears to be the norm in food delivery, but highlights another issue, which is that restaurants are skeptical of the economics of food delivery.

Privately held DoorDash is now valued at $7.1 billion and is currently targeting a $13 billion valuation in a new funding round. It also is unprofitable on a GAAP basis.

Uber and DoorDash are both bringing deep pockets to the food-delivery battle royale. Uber is flush with cash following an IPO that brought in $8 billion, and DoorDash is seeking to raise $650-$750 million in its next funding round.

Notably, Softbank (NASDAQOTH:SFTBF), the Japanese conglomerate and venture capital titan, has funded both companies, and was the main funding source of DoorDash's expansion. It's odd for the company to fund two competitors, and its active participation in the industry may present further problems for Grubhub, as Softbank seems more than willing to fund Grubhub's competitors regardless of profitability.

Lack of competitive advantage

On top of the seemingly endless funds its competitors have to play with, the other problem Grubhub and the other food-delivery players seem to have is that the business doesn't lend itself to competitive advantages. Food delivery is essentially a commodity business. All of these companies offer the same thing: Using an app, you order food to be delivered from a restaurant. Though they have formed exclusive partnerships with restaurants in order to create a moat, the essential service remains easily replicated. Like ride-sharing, it's hard for companies to distinguish themselves from one another. 

It also appears that customers don't have much loyalty to a particular service, meaning competition should only increase as the market becomes saturated, and growth depends more on grabbing share from competitors than bringing in new ones. According to Second Measure, the share of Grubhub customers who didn't use competing services fell from 88% in the first quarter of 2017, but that had fallen to just 62% by the first quarter of 2019. For other delivery apps, the share of loyal customers is even lower. 

What it means for Grubhub

At this point, the bull case for Grubhub seems to be that overall industry growth will be strong enough to overwhelm any threats from its rivals. A rising tide will lift all boats, in other words. But with DoorDash and Uber Eats well funded and hungry for market share, Postmates about to make its IPO, and Amazon seemingly taking a greater interest in food delivery, that's getting to be a tougher bet to make.

Grubhub is making some steps in the right direction, including growing adjusted EBITDA per order sequentially in its most recent quarter from $0.98 to $1.09. But if the company is forced to continue defending market share, profits are likely to fall. With the stock still priced for growth, that means the recent slide may not be over.