Grubhub's (GRUB) stock recently plunged after the food delivery company provided a business update regarding the COVID-19 pandemic. It warned that its business took a big hit in the second half of March, but noted that a few green shoots appeared in April. Let's see how the pandemic could affect its business in the long run.
First, the bad news...
Grubhub expects its first-quarter revenue and adjusted EBITDA to be "slightly above the midpoints" of its prior guidance for 8%-11% revenue growth and a 51%-71% decline in adjusted EBITDA. It also pulled its guidance for the full year, which had called for 8%-15% revenue growth with a 46% drop in adjusted EBITDA.
Grubhub noted its business was "trending at or above the high end of our guidance range for the first ten weeks of the quarter," but it "experienced a swift change in customer behavior in the middle of March when the pandemic took hold across the country." That deceleration caused its daily average grubs (DAGs) to come in "flattish" compared to the prior year.
Grubhub noted its business in New York City, one of its top markets, experienced a steeper slowdown due to the "severity of the COVID-19 impact." Its corporate business, which accounted for a mid-single-digit percentage of its orders last quarter, also took a big hit in mid-March as "virtually all" of its clients shifted to work-from-home models.
Now, the good news...
On the bright side, Grubhub saw "trends improve significantly" in the beginning of the second quarter, which started on April 1, with approximately 10% year-over-year growth in DAGs so far. It noted its orders were stabilizing in New York, while less affected markets were already rebounding to pre-COVID-19 levels. As a result, it expects to "see a return to more typical behavior when the COVID-19 impact on daily life wanes."
Grubhub also plans to support the restaurant industry with subsidized diner promotions, discounted and free deliveries, and new platforms and procedures to "keep drivers, diners and restaurant workers safe." It expects those initiatives to reduce its adjusted EBITDA by $5 million in the second quarter.
Grubhub said if it didn't make those investments, it would have generated "meaningful profits" in the second quarter and "comfortably" hit its prior target for at least $100 million in adjusted EBITDA in 2020. It also remains financially sound, with approximately $600 million in liquidity at the end of March 31 -- including $175 million from a revolving credit facility -- which arguably gives it a more sustainable business model than DoorDash and Uber (UBER 8.63%) Eats.
Is this a net negative or positive for Grubhub?
Grubhub was already struggling prior to the COVID-19 outbreak, with five straight quarters of revenue declines and tumbling profits. DoorDash also stole its crown in the U.S. market, as other rivals -- including Uber and Postmates -- fragmented the market. DoorDash controlled 39% of the U.S. food delivery market at the end of February, according to Second Measure, followed by Grubhub (30%), Uber Eats (20%), and Postmates (10%).
However, DoorDash recently filed some confidential paperwork for an IPO, which suggests it's running out of cash from private investors. If DoorDash goes public, it probably can't burn cash as aggressively as it did as a hot start-up. Uber, which is racking up losses in both its ride-sharing and food delivery segments, could also struggle to keep pace with Grubhub and DoorDash. Uber recently sold Uber Eats in India to its rival Zomato, and it could be forced to strike a similar deal with Grubhub or DoorDash in the U.S. as both of its core businesses slow down.
As the industry's most profitable player, Grubhub could be better insulated from the COVID-19 pandemic than DoorDash and Uber Eats. Its investments in its restaurant partners could also help it regain some of its lost market share as DoorDash and Uber lose momentum.
The key takeaway
Grubhub's update arguably contained more positive points than negative ones. Its business already started recovering in April, and the gradual reopening of businesses could bring more of its restaurants, drivers, and customers back online.
Grubhub isn't out of the woods yet -- it still faces stiff competition and an endless war of discounts and promotions. However, Grubhub could emerge from the crisis as a more appealing play on the crowded food delivery market if its less-profitable rivals stumble.