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Is Grubhub Stock a Buy?

By Parkev Tatevosian - Dec 4, 2020 at 9:07AM

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The rise in coronavirus cases is increasing food delivery orders, but will Grubhub benefit as a result?

Food delivery companies are benefiting as people are wary of dining in at restaurants. The shift to ordering meals instead of dining in person is likely to accelerate in the coming months as coronavirus cases are surging in several regions around the world. 

Grubhub ( GRUB ) is no exception to the trend, as sales and new customers are increasing substantially. An interesting note about Grubhub is that the investment is just as much about Just Eat Takeaway ( GRUB -4.29% ) as it is about Grubhub. The former acquired the latter in an all-stock deal. That being said, let's take a closer look to determine if Grubhub stock is worth buying right now. 

A woman with a fork and knife in hand ready to eat.

Just Eat Takeaway agreed to buy Grubhub. Image source: Getty Images.

The purchase arrangement 

On June 10, 2020, Just Eat (JET) and Grubhub agreed on a deal in which JET would acquire 100% of Grubhub in an all-stock transaction valued at over $7 billion. The merger is expected to close in the first half of 2021. The terms of the deal predicated that Grubhub shareholders would receive 0.671 shares of JET for each share of Grubhub stock. The two companies will now be connected until the deal is consummated.

Eating out at your dining room table 

In recent weeks, coronavirus cases have been surging in many parts of the world, and several local U.S. governments have issued further dining restrictions at restaurants. Those developments should boost orders for delivery. And even though there have been positive developments for a coronavirus vaccine, it could be more than six months before enough of the population is inoculated to achieve herd immunity. 

Moreover, restaurants were helped by outdoor dining established during the warmer summer months. However, as colder weather moves in, those benefits will be reduced as people will not be inclined to sit outside when it's raining, snowing, or uncomfortably cold. 

In the meantime, food delivery will continue to step in to fill the void for restaurants and people looking to treat themselves to a meal they don't need to prepare. Coincidentally, in the most recent quarter, both Grubhub and JET reported a 46% increase in customer orders year over year. Given the increase in coronavirus cases, more government restrictions on restaurants, and the start of the cold weather season, it won't be surprising if customer orders continue on that high growth trajectory.

The verdict

The substantial growth prospects in the near term will allow Grubhub and its acquirer JET to reach a level of scale that may have otherwise taken years to achieve. In some instances, restaurants have had no other choice but to partner with food delivery companies if they want to survive the pandemic. A sizable percentage of these businesses are likely to maintain these partnerships long after the pandemic has run its course. The ones that don't will risk losing sales to competitors that offer meal delivery. 

A chart comparing Uber with Grubhub on price to sales, enterprise value to revenue, and enterprise value to earnings before interest taxes depreciation and amortization.

Data source: YCharts.

The good news for investors is that Grubhub stock sells for roughly the same forward price-to-sales ratio as it was at in July. At that time, the food delivery industry was not as hot as it is now. It was unknown if coronavirus cases would surge again in the fall and in-person dining would face further restrictions. Comparatively, Grubhub stock is selling at a significant discount to competitor Uber, a major player in the food delivery business.

The excellent near-term prospects give the company a good chance to maintain that momentum for the long term, as restaurants will be reluctant to end food delivery options. Additionally, the company is valued relatively fairly. If you are looking to invest in the food delivery market, buying shares of this growth stock is a viable choice.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

GrubHub Inc. Stock Quote
GrubHub Inc.
Just Eat N.V. Stock Quote
Just Eat N.V.
$11.61 (-4.29%) $0.52

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