If you can't beat 'em, join 'em.

That's what Grubhub (NYSE:GRUB) seems to be thinking these days. The Wall Street Journal reported Wednesday that the struggling food-delivery service is considering strategic options -- including a sale -- and it has asked financial advisors to look at next moves for the company after its stock lost nearly two-thirds of its value from its peak in late 2018. At the same time, Grubhub's market share has plunged amid competitors like Uber (NYSE:UBER) Eats and DoorDash.  

Grubhub shares tumbled more than 40% in its most recent earnings report as profits fell sharply. Market share losses forced the company to spend more aggressively on marketing and other expenses to grow its customer base and keep customers that were considering rival services. Although revenue rose 30% in the third quarter, adjusted earnings per share fell 40% to $0.27 and management called for adjusted EBITDA of $15 million-$25 million for the current quarter, down from $42.1 million in the fourth quarter of 2018.   

A user looking at the Grubhub app.

Image source: Grubhub.

CEO Matt Maloney called Grubhub's customers "promiscuous" in a letter to shareholders, indicating that brand loyalty was declining in the industry. That report and today's news together mark a surprising reversal from the company's first-quarter earnings report in April 2019 when Maloney dismissed his competitors and argued that Grubhub was the best operator in the industry, saying, "I'm extremely confident because I feel that we're winning across the board when it comes to chain and enterprise conversations."

A lot has changed in less than nine months.  

The way Grubhub sees it

The food-delivery industry has seen rapid consolidation in recent years with Grubhub itself among the major buyers. It's snapped up Eat24 from Yelp, as well as Tapingo, LevelUp, Foodler, and OrderUp, among others. DoorDash, meanwhile, took over Caviar from Square, and Uber has made a number of deals in its core ride-sharing business, while Uber Eats acquired South Africa-based restaurant technology company OrderTalk. Amazon even called it quits in the restaurant-delivery game, showing how competitive it's become. 

According to the Journal's report, that industry track record leads Grubhub to believe it could be an appealing takeover target if it put itself on the auction block. DoorDash and Postmates are both aiming to go public and acquiring Grubhub would be an easy way to do so, while Uber has billions to play with following a splashy IPO and also has a history of big M&A deals.

Why it probably won't happen

Grubhub is currently valued at $4.8 billion, following a 13% spike on the news that it was considering a sale and surprising recovery from the October sell-off. The stock has nearly recovered from the plunge following the third-quarter report. 

However, Grubhub is in the weakest position it's been in since it went public, meaning it still seems overvalued at its current position. Grubhub's market share has dwindled from about 70% in 2017 to just 30% today, according to data from Second Measure, meaning that competitors have already had plenty of success in taking away Grubhub's customer base. Given that, the need for one of these competitors to spend upwards of $5 billion to take over a weak competitor that's already losing market share seems minimal.

Maloney's own statements also back up this argument. By calling online diners "promiscuous," he's acknowledging that customers are fickle and can easily be won over by competing brands with discounts and other offers. While restaurant relationships are important, ultimately the customer is driving this business, and until Grubhub can secure its customer base, there seems to be little reason for a rival to offer it a buyout, at least at the current price. 

Maloney also told the Journal in October after the stock plunged that the industry is "in a weird bubble that is about to burst." While Grubhub's bubble may have burst after the third-quarter earnings report, it seems to have gotten reinflated since then. Meanwhile, peers like DoorDash, which reached a valuation of $12.6 billion in its last funding round, may have a tougher time getting funding as market sentiment changed after the WeWork collapse, and Uber is deeply unprofitable but aiming for adjusted EBITDA profitability by the end of 2021. Spending billions to take over Grubhub, then, which is its own turnaround project, wouldn't seem to be in either company's interest. And if the industry bubble is about to burst, now would be a particularly poor time for a food-delivery company to spend $5 billion on a deal. If the bubble does burst, they could likely buy Grubhub for much less.

At this point, analysts expect Grubhub to generate just $0.22 in earnings per share for 2020, giving the stock a P/E ratio of about 250 based on those estimates. If Grubhub has essentially no profits and its customers aren't particularly loyal, then the value it would bring to an acquirer seems negligible.

Though the market may like the idea, a white knight is not about to come in and save Grubhub.