That Q3 report made clear that Grubhub would not be able to maintain its pattern of posting strong top-line growth and profits in the face of competition from Uber (UBER -3.28%) Eats and DoorDash, which have been successfully attracting both customers' orders and restaurant partnerships. At the time, CEO Matt Maloney even called consumers "promiscuous," noting that Grubhub users were no longer showing loyalty to the service, but instead ordering from multiple providers.
In the months leading up to the arrival of its Q4 report last week, Grubhub's share price fully recovered from that sharp tumble. No specific news propelled the price rebound, though there was a rumor about the company selling itself, which management dismissed. Instead, investors appeared to be gradually buying into the company's new strategy as well as its upside potential, and they were willing to take a chance on a stock that is still down nearly two-thirds from its all-time high.
However, Grubhub's business recovery won't come easy. Both its latest guidance and management commentary during the Q4 earnings call made it clear that 2020 will be its most challenging year yet as a publicly traded company.
A new Grubhub
Competition and a changing marketplace have forced Grubhub to adapt its model. Its priority has now become growing its restaurant base to keep customers on its platform and investing in technology to strengthen restaurant partnerships, provide more transparency to diners, and better enable order pickup.
As a result of those initiatives and increased competition, the company expects its profits to take a hit in 2020, and for revenue growth to slow considerably. The guidance calls for revenue in the range of $1.4 billion to $1.5 billion, up 10.5% from 2019, much slower than the 30% growth rate the company achieved in 2019. Meanwhile, the company projects adjusted EBITDA of at least $100 million for 2020, compared to $186.2 million in 2019 and $233.7 million in 2018.
In its letter to shareholders, management said that the changes it was implementing would take time to roll out and to have an impact on the business. The most important of those changes may be that the company is now pursuing non-partnered restaurants aggressively. These are independent restaurants that don't give Grubhub any payments for listing them on its platform. Instead, it collects all of the delivery fees and any other associated fees but is tasked with putting in the orders itself. Consequently, these are lower-value orders, and Grubhub derives little profit from them. However, the company has made this niche a priority because it views independent restaurants as a key to keeping customers coming back to its platform. Nonetheless, the strategy will likely cost it profits over the long term.
Because of this initiative, Grubhub more than doubled the number of restaurants on its platform in just one quarter to 300,000, but in another sense weakened its business model.
Competition isn't going away
Grubhub seems to believe that competition in the market will rationalize as rivals like Uber and DoorDash eventually have to start worrying about making profits. Uber has set a goal for itself of turning an adjusted EBITDA profit by the end of this year. However, it may be preparing to go after the U.S. market more aggressively as it recently sold its Uber Eats businesses in India and South Korea, and has pledged to make Eats No. 1 or No. 2 in all the markets it operates in. According to data from Edison Trends, Uber was No. 2 in January with a market share of 28.8%.
DoorDash, meanwhile, was No. 1 with 34.6% of the market. That company, which is likely to go public soon, needs to show continued growth to keep its valuation up. Because of that, if DoorDash does shift to profitability, it will be a gradual shift, much like the one Uber is undertaking.
Both companies also appear to have plenty of cash to spend in their market share war. According to Bloomberg, DoorDash in November was considering using a direct listing to go public rather than a traditional IPO. That's generally a sign that a company has plenty of cash since a direct listing doesn't raise any fresh capital for the business. Uber finished last year with more than $11 billion in cash and marketable securities -- plenty of financial firepower for any battle of attrition. Grubhub, by comparison, finished the year with $425 million in cash and equivalents.
Grubhub once dominated the online food-delivery marketplace and had a good business doing it. Over the last few years, however, its market share has gone from 70% to less than 30%, and profits are now evaporating too. It has been forced to expand its model from restaurant menu aggregator to handling deliveries as well, which has eaten into profitability. If everything goes according to management's plan, the company should be in a better place in a year or two, but that will require a lot of things to go right. And competition might get in the way.
Grubhub is still priced like a growth stock, but it's only growing modestly and its profits have shrunk significantly. The downside risk still outweighs the upside potential here.