Shares of Grubhub (GRUB +0.00%) plunged 43% on Tuesday after the company released its third-quarter report, and the stock is now down nearly 80% from where it was a little more than a year ago. It's been a dramatic collapse for the food delivery specialist that was once the clear market leader in the fast-growing industry, but a perfect storm of challenges have crushed the stock over the last year.
In the third quarter sales at the company rose 30% to $322.5 million, missing estimates at $330.5 million, but the real problem came on the other end of the income statement -- and in its guidance. Earnings per share crumbled from $0.24 a year ago to just $0.01, and net income per order was just $0.02, down from $0.59 in the quarter a year ago. Adjusting for things like stock-based compensation, EPS fell from $0.42 to $0.27, meeting analysts' muted expectations.
For the fourth quarter the company's challenges came into full view, as it called for just $315 million-$335 million in revenue, or 13% growth at the midpoint. That was much worse than the analyst consensus at $387.5 million, and would be its slowest growth as a publicly traded company. Bottom-line guidance was also troublesome, as management expects just $15 million-$25 million in Adjusted EBITDA, meaning the company will come up well short of its prior full-year guidance of $235 million-$250 million in Adjusted EBITDA.
A combination of foreseeable issues led to the stock's unraveling. Let's take a closer look at the biggest factors, and what investors can take away here.
Image source: Grubhub.
1. Growth means little without barriers to entry
For years, what attracted investors to Grubhub was the company's fast growth in an industry with a significant addressable market -- restaurant takeout and delivery. Though the company delivered solid growth and profits, pushing the stock higher until its peak last year, the emergence of the app-based food delivery industry attracted competition, in particular from deep-pocketed companies like Uber and DoorDash, as well as Postmates, which wanted a piece of the fast growth and profitability that Grubhub demonstrated.
Grubhub had essentially no significant competitive advantages. The company hoped to differentiate itself and create some barriers to entry with its brand, restaurant partnerships, and network of drivers. However, that wasn't enough to counter the desire of restaurants to be on as many ordering platforms as possible, customers' tendency to shop around for the best deal available, and a marketing blitz from its competitors.
2. Market share losses will eventually hit the bottom line
Grubhub's market share losses had been apparent for several quarters. The industry first saw a surge from Uber and later Doordash, which has eclipsed Grubhub as the market share leader according to data from Second Measure. Grubhub's market share has dwindled from 70% in 2017 to just 30% as the industry has seen an onslaught of new capital.
When you lose so much market share so fast, you also lose the ability to dictates terms in the industry, terms like order fees, restaurant commissions, and employee wages. Grubhub went from being something close to a monopoly in some markets to being just one of several competitors hustling for orders, plastering ads everywhere, and scrapping for growth.
Although the company has long maintained that there is plenty of opportunity in the industry, as many customers still rely on paper menus and phone calls, gains from that side of the market aren't coming fast enough to offset losses to competitors.
3. It's hard to compete with venture capital
Both Uber and DoorDash have been funded by Softbank -- the Japanese tech conglomerate more recently associated with the demise of WeWork -- to the tune of hundreds of millions of dollars. Venture capitalists like Softbank tend to value growth above all else, and are willing to overlook steep losses in exchange for sales and market share gains, as Uber and DoorDash have been able to demonstrate.
Grubhub, which has been publicly traded since 2014, can't tap venture capital and must meet the demands of its shareholders, who expect to see growth on both sides of the ledger. That puts it at a disadvantage against rivals like DoorDash, which don't need to please shareholders with profits. Not only have Grubhub shares tumbled this year, but so have Uber's following its IPO in May, evidence that both food delivery and ridesharing have been overvalued by start-up investors.
4. Consolidation is often a warning
Industries experience consolidation when small players believe they can't survive on their own. For a number of reasons, including technological advances or intensifying competition, these companies seek to merge or be acquired in order to survive. Food delivery has seen this kind of consolidation recently, but what's been particularly notable was that even deep-pocketed operators decided to bow out rather than compete in a cutthroat market. Square sold Caviar, its food delivery app, to DoorDash in August for $410 million, and Amazon shuttered Amazon Restaurants, its delivery start-up, in June. When even Amazon would rather give up and go home than compete, that's probably a sign that demand in the market isn't worth pursuing.
What it means for Grubhub
The road ahead for the one-time takeout star doesn't look any easier. As long as the market share war persists between Grubhub, Uber Eats, DoorDash and Postmates, profits are going to get squeezed across the board. Grubhub's sales and marketing spending has already jumped 55% through the first three quarters of this year, compared to just 35% revenue growth.
Ultimately, the food delivery industry doesn't look like it's going to yield significant profits for anyone. This is a commodity business, and customers are going to be fickle and price-sensitive, as they are now proving to be amid the current market share battle. That's great news for consumers hungry for takeout, but it's not so appetizing for Grubhub and its investors. Until its rivals start to focus on profits instead of market share, Grubhub's own profits and its stock are likely to remain down.
