It's been a difficult 12 months for mobile food delivery service Grubhub (GRUB), and there could be more tough times ahead. Since its stock reached an all-time high of $146.11 on Sept. 14, 2018, it has been on a relatively consistent downward spiral. Year-to-date, Grubhub stock is down 25%, reaching as low as $55.93 at closing on Sept. 26.
The company, which was once the innovator of the all-in-one mobile food delivery space, is now facing extreme competition and rising costs that have shrunk its profits considerably.
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At the Delivering Alpha conference in mid-September, Jim Chanos, founder and president of Kynikos Associates and short seller, said he is shorting the company's stock. Chanos told CNBC, "Grubhub is making almost no money per order -- it's something like 15 cents."
When Chanos talks, investors listen. Since his comments on Sept. 12, Grubhub stock has dropped almost 16%.
How Grubhub got here
Through its first two and a half years on the New York Stock Exchange, Grubhub's stock price experienced gradual growth. It wasn't until 2018, though, that the company's concept took hold across the country, and investors responded in a big way.
For the first eight months of 2018, Grubhub's stock was on a roll. It reached its peak of $146.11 on Sept. 14, climbing 50 percentage points since Jan. 1, 2018.
But then, savvy investors realized something following the company's 2018 third-quarter earnings call: Grubhub was falling short of expectations. Wall Street was expecting a 30% increase in EBITDA for the fourth quarter, but the company said it was guiding that number to be a decline of nearly 30% year over year. That led investors to flee the stock, marking the beginning of its 12-month descent.
Revenues for Grubhub were actually pretty good in 2018, reaching $1 billion at year's end, a 47% increase from $683.1 million the year before. However, the company reported a 21% decrease in net income year-over-year, from $99 million in 2017 to $78.5 million in 2018.
In its first-quarter and second-quarter earnings calls of this year, Grubhub reported net income decreases of 78% and 96% year-over-year, respectively. Non-GAAP adjusted EBITDA dropped $10 million from the second quarter of 2018 to the second quarter this year as well, reaching $54.7 million.
Consistently decreasing numbers such as those are always concerning, especially as "active diners" in the market continues to increase, up to 20.3 million in the second quarter, or a 30% year-over-year increase, according to Grubhub.
Grubhub is no longer the king of food delivery
For years, Grubhub was the undisputed leader in the food delivery market. Capitalizing on what is known as the gig economy, the company secured deals with local eateries to offer mobile ordering and delivery options for customers.
But earlier this year, Grubhub abdicated its throne atop the food delivery kingdom. Silicon Valley start-up DoorDash overtook Grubhub in market share in May, with both companies hovering around the 35% range.
Grubhub once owned close to 70% market share as recently as 2017, but extreme competition has caused it to dwindle. Private companies such as DoorDash and Postmates -- which is expected to IPO soon -- as well as Uber's Uber Eats brand are all fighting for the same finite number of customers, spending loads of money on marketing and customer incentives to do so.
So far, Grubhub has struggled to keep pace with DoorDash, which recently received a valuation of $12.6 billion, while Grubhub's value is closer to half that.
The cost of doing business is going up, too
In addition to fierce competition for customers, Grubhub is facing similar challenges to find new drivers and keep current ones. With more and more gig delivery companies hitting the market -- across a number of industries -- drivers are flocking to whatever company is offering them the best pay, perks and working conditions.
This has forced Grubhub to spend more on marketing and consider paying drivers more as well, which have all led to shrinking profits.
At the same time, Grubhub and other gig economy companies are facing labor challenges. California's Senate recently passed Assembly Bill 5, which would, in part, require Grubhub and other delivery companies to classify their workers as employees.
These companies have long classified their workers as independent contractors, which have allowed them to avoid adhering to minimum wage standards, offering benefits, and paid time off, among other worker protections. If the bill were to become law, and if other states took up similar measures, it could force a monumental shift in Grubhub's business strategy.
What's ahead for Grubhub?
When someone like Chanos says he's shorting a stock, it should cause most investors to pause, to say the least. Indeed, there has been a sell-off of sorts on Grubhub stock since Chanos' remarks.
For now, investors would be wise to stay put and see what happens for Grubhub following its third-quarter earnings call. The fourth quarter is a traditionally good time for food delivery service companies, though, so investors looking to buy Grubhub stock for the long-term could score a good deal now, as the price continues to drop.
It's too early to count Grubhub out completely over the long haul. While it is having a tough time competing with the big-money funders of DoorDash, don't forget that Grubhub basically created the industry it's in only a few years ago. There was ingenuity then, and there may be some more still on the horizon.
