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A Merger Could Make Grubhub Scrumptious Again

By Rhian Hunt - Updated Jan 2, 2020 at 3:03PM

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Teaming up has given other food delivery services a boost, but Grubhub might not pursue that route.

Still standing despite a drubbing, Grubhub (GRUB) lost stock value at a headline-making rate over the past year, but managed a tasty boost to its sales. Analysts think a merger with Amazon (AMZN 3.66%) or Uber (UBER 2.47%) could turn Grubhub into a stock market dynamo again, considering that several metrics remain notably positive. Successful food delivery mergers in Germany strongly suggest the analysts are right, but investors should stay cautious until an actual merger offer appears.

Grubhub's advertising strategy

The food delivery specialist still displays some strong metrics despite Grubhub's share price dropping approximately 70% since its 2018 peak. Using a heavy promotional push, it boosted its number of "active diners" in Q3 from 16.4 million to 21.2 million – a 29% year-over-year jump. Gross food sales in Q3 rose 15% year over year to $1.4 billion.

In his Oct. 28 Grubhub shareholder letter, CEO Matt Maloney defended his focus on advertising. He cited the company's increasing adjusted EBITDA per order, which rose from $0.98 in Q4 2018 to $1.28 in Q3 2019 – a 31% profit increase per meal. Maloney's arguments remained somewhat vague, but he suggested that Grubhub's large-scale marketing served as an advertising substitute for smaller partners, allowing them to sell more profitable meals efficiently while incurring lower overhead costs.

Person Placing a Grubhub Order on Their Smartphone

IMAGE SOURCE: GRUBHUB

The added expense of Grubhub's strategic choices took an admittedly large bite out of margins. In Q3 2018, the company served up a juicy $22.7 million in net income, amounting to $0.24 per diluted share, which helped to explain its soaring stock price at the time. In 2019, the company's marketing outlays and other expenses slashed Grubhub's Q3 net income to $1.0 million, just $0.01 per share. Maloney argues the company will "grow into" its advertising outlays during 2020, causing a rebound in margins.

Why a meal-delivery merger might work

Many leading analysts condemn Grubhub's expensive marketing strategy, however, calling for a merger with another company instead. Barclays supported this viewpoint, while upgrading the company's rating from "sell" to "strong buy." The analysts suggest the company look to combining with Uber or Amazon to cut the fat and leverage efficiencies to boost profits and stock market price.

The example of Takeaway.com (AMS: TKWY) and Delivery Hero (DHER) in Germany suggests they're right; the $1.1 billion merger powerfully benefited both companies. Takeaway.com (the equivalent of Amazon or Uber in the current situation) gained Delivery Hero's large sales territory and infrastructure, while Delivery Hero (the analog to Grubhub) got massive financial backing and reduced many of its internal inefficiencies.

Shares of Takeaway.com and Delivery Hero rose 24% and 14%, respectively, as soon as they announced the merger in 2018, then soared approximately 55% and 67% between Jan. 1, 2019 and early December 2019. A similar jump in Grubhub's stock would bring it back to 2018 levels, strongly rewarding investors.

Reasons to wait and see

Grubhub's current situation sends mixed investment signals indicating caution is in order. The company still dishes up some savory fundamentals, while showing itself resilient in the face of food delivery market structural problems. The example of the Takeway.com and Delivery Hero merger provides strong objective evidence that a merger would probably be the recipe for turning Grubhub into a gourmet investment again. However, management's current direction makes a merger somewhat more unlikely.

Those with a position in Grubhub may want to keep their stocks in light of its relative continuing strength. If you're a potential first-time buyer of Grubhub shares or are mulling increasing an existing position, a cautious, moderate approach seems wisest until actual merger plans become public. That event – if it arrives – would signal that Grubhub will probably start serving up its special stock market sauce again, becoming a strong buy before prices skyrocket back to their 2018 levels or higher.

Editor's note: This story has been updated to remove mention of a class action lawsuit.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,302.93 (3.66%) $81.38
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$119.77 (1.71%) $2.01
GrubHub Inc. Stock Quote
GrubHub Inc.
GRUB
Uber Technologies, Inc. Stock Quote
Uber Technologies, Inc.
UBER
$23.67 (2.47%) $0.57
Delivery Hero Stock Quote
Delivery Hero
DHER

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