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Should Investors Sell Grubhub at Its Two-Year Low?

By Leo Sun - Oct 30, 2019 at 12:31PM

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The meal delivery company finally admits that it’s struggling against the competition.

Grubhub's ( GRUB ) stock recently plunged to a two-year low after the meal delivery company's third-quarter numbers missed analysts' expectations. Its revenue rose 30% annually to $322.1 million, but that marked a slowdown from previous quarters and missed expectations by $7.4 million.

On a GAAP basis, Grubhub's net income plunged 96% to $1.0 million, or $0.01 per share. On a non-GAAP basis, which excludes stock-based compensation and other one-time charges, its net income fell 41% to $24.7 million, or $0.27 per share, which missed expectations by a penny. Its adjusted EBITDA dropped 10% to $53.8 million.

A businessman watches a stock chart plunge through a floor.

Image source: Getty Images.

Grubhub's slowing growth indicates that it's struggling against rivals like DoorDash and Uber ( UBER 1.92% ) Eats in a highly competitive market. Therefore investors might be wondering if it's finally time to dump Grubhub and buy more promising growth stocks instead.

Another quarter of decelerating growth

Grubhub measures its growth in daily average grubs (meals), gross food sales, and active diners. All three figures consistently rose by the double digits over the past year, even if they're decelerating.

YOY growth

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Daily Average Grubs

37%

19%*

19%

16%

10%

Gross Food Sales

40%

21%

21%

20%

15%

Active Diners

67%

22%

28%

30%

29%

Revenue

52%

40%

39%

36%

30%

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

Grubhub's growth in daily average grubs decelerated significantly during the third quarter, and will likely drop to the single digits over the next few quarters.

Grubhub mainly attributes that slowdown to growing competition in the market and weaker loyalty rates among new diners. Grubhub previously scaled up via a long list of acquisitions, which bolstered its inorganic growth, but it's running out of smaller players to acquire.

DoorDash also surpassed Grubhub as the top meal delivery service in America earlier this year, according to Second Measure, and claimed 34% of the market in September, compared to Grubhub's 30% share. Uber Eats held 20% of the market.

The bears believe the escalating battle between these platforms for restaurants and diners will curb Grubhub's revenue growth and crush its margins. In its shareholder letter, Grubhub admits that "the easy wins in the market are disappearing a little more quickly than we thought." That struggle is reflected in Grubhub's horrendous bottom-line declines over the past year.

YOY growth

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

GAAP net income

75%

(110%)

(78%)

(96%)

(96%)

Non-GAAP net income

72%

(47%)

(41%)

(46%)

(41%)

Adjusted EBITDA

41%

(26%)

(21%)

(19%)

(10%)

YOY = Year-over-year. Source: GrubHub quarterly reports.

Those declines dull Grubhub's sharpest advantage against DoorDash and Uber -- its profitability. DoorDash and Uber Eats are both unprofitable, so some bulls believe that Grubhub could outlast those rivals as the last man standing in a low-margin industry. But if Grubhub's bottom line dips into the red, it could be stuck in a brutal race to the bottom.

Bleak guidance points to future losses

Grubhub's guidance for the fourth quarter indicates that the situation won't improve anytime soon. It expects its fourth-quarter revenue to rise just 9%-16% annually, compared to Wall Street's expectations for 35% growth. It expects its adjusted EBITDA to decline 41%-64% annually during the fourth quarter, versus expectations for 88% growth.

Grubhub's mobile app.

Image source: Grubhub.

Grubhub warns that its orders will likely decelerate again, that it must spend more cash to gain more restaurants and diners, and that it's still providing free deliveries and promotional support to large enterprise partners like Yum Brands' ( YUM 0.34% ) KFC and Taco Bell, McDonald's ( MCD -0.13% ), and Panera Bread.

In other words, Grubhub is slipping into the dreaded trap of driving its sales growth with margin-crushing strategies. Grubhub expects its growth in daily average grubs to improve in 2020, but it also expects that expansion to impact its EBITDA growth.

Is it time to give up on Grubhub?

Grubhub didn't offer any formal guidance for 2020, but analysts previously expected its revenue to rise 26% and for its non-GAAP earnings to grow 56%. At $40, Grubhub's stock trades at about 20 times that earnings estimate.

However, analysts will likely reduce their EPS forecasts significantly after Grubhub's latest report, so that forward multiple isn't reliable. In terms of revenue, Grubhub looks cheap at about two times next year's sales -- but it trades at that discount because its growth is decelerating.

Investors shouldn't consider Grubhub's post-earnings drop to be a buying opportunity with so many headwinds on the horizon. Grubhub's current inventors shouldn't sell into the panic yet, but they might consider cutting some losses if the stock rebounds.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

GrubHub Inc. Stock Quote
GrubHub Inc.
GRUB
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$259.58 (-0.13%) $0.33
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$131.74 (0.34%) $0.44
Uber Technologies, Inc. Stock Quote
Uber Technologies, Inc.
UBER
$38.81 (1.92%) $0.73

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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