Grubhub (GRUB) hit an all-time high of approximately $146 in September 2018, but the stock has been bad news ever since. Shares fell steeply to $70 in Q4 of that year, bounced around that range for several months, then sank below $34 in October 2019. A bad earnings report was to blame for that slide — analysts and investors felt they could not justify an aggressive valuation in an increasingly competitive environment.
Grubhub stock is now more than 70% below the all-time high achieved just over a year ago, and the new price looks much more reasonable based on its operating cash flows. A closer look at this stock will show if the price has adjusted properly, or if this is a growth stock with a cheap price tag.
Growth remains strong, but profitability is a concern
Grubhub's top line has continued to expand every year, but those increases are not translating into profits. Its trailing nine-month revenues were up 35% year-over-year as of the most recent quarterly report, slightly below the three-year average growth rate. To achieve this growth, the company has continued to experience higher expenses across every category. Costs related to sales, marketing, and operations are making the most substantial difference.
Grubhub's operating income dropped to $9.2 million for the first three quarters of the year, down from $83.6 million over the same period in 2018. The change in free cash flow through the first nine months of the year was less drastic, falling only $34 million year-over-year. This difference is attributable to several high, non-cash expenses, as well as changes in working capital.
Grubhub is operating in an increasingly competitive space
Grubhub was one of the first movers in the food delivery app industry, but it now has several capable rivals to its core offering, including Uber (UBER -4.08%), DoorDash, and Postmates. Furthermore, management has indicated Grubhub's new users are much more likely to use multiple apps for the same purpose.
The industry is expected to reach $200 billion annually by 2025, meaning that Grubhub has a lot of upside potential with only 1.7% of current market share. Nonetheless, there are only modest barriers of entry for new competitors, and fragmentation across the globe is already substantial. As a result, customer acquisition expense is likely to rise, customer lifetime value is likely to drop, and promotional activity is likely to be an important element of the competitive landscape moving forward.
Shares are still expensive relative to the company's fundamentals. Despite the falling price, Grubhub still trades at 126 times its forward earnings, with an EV/EBITDA ratio of 32 and a price-to-free cash flow of 39. These valuation metrics are all fairly aggressive, though the latter two are more in line with the industry range.
Of Grubhub's most direct competitors, Uber is the only company that's publicly traded. Uber does not produce net profits, free cash flow, or positive EBITDA, though Grubhub does trade at a slightly lower price-to-sales ratio than Uber. Therefore, it is hard to draw apples-to-apples comparisons. However, the aforementioned profitability metrics all stack up as expensive compared to the likes of Yelp and Groupon, and are roughly in line with Match Group.
The bull case for Grubhub holds that the company is in a strong position to benefit from exploding global demand, and exposure to this growth recently become far less expensive than a year ago. Continued execution in an increasingly competitive marketplace would be necessary to make this stock hot in the next year, and investors have already shown a willingness to attach speculative valuations when results are good.
Bears will look skeptically at increasing competition, struggles to deliver profit growth despite scaling, and rich valuations as red flags for the long-term viability of a long position. For the risk-averse investor, this stock might need more adjusting before the growth outlook matches the price, especially with a market downturn becoming more likely in the medium term.