On GrubHub's (NYSE:GRUB) first day of trading on April 4, shares soared nearly 31% to close at $34. After seeing such a meteoric rise, some investors are probably thinking that it's too late to get a tasty bite of the company, but this might not be so. Yes, GrubHub's shares are trading at a significant premium compared to the $26 they were slated to go for, but does the business still have room to run? Should investors consider buying a stake in OpenTable (NASDAQ:OPEN) or Groupon (NASDAQ:GRPN) instead?
GrubHub is a major growth engine
Over the past three years, GrubHub, an innovative online delivery service, has seen tremendous growth. Between 2011 and 2013, the company saw its revenue skyrocket 126% from $60.6 million to $137.1 million. According to the company's prospectus, the primary driver behind its sales increase was a greater number of active diners, rising from 689,000 to 3.4 million.
Looking at revenue and customer count, investors might get the impression that the business is thriving. The truth is that, to some extent, it is. But it has been doing so at the cost of potential profitability.
During the same time frame noted above, GrubHub's net income actually shrank by 62% from $14.9 million to $5.7 million. The culprit behind the company's falling profits had to do with most of its cost structure. But among the largest detriments were its operations and support expenses, which rose from 23% of sales to 24.9%.
Is OpenTable a better pick?
Probably the closest comparable to GrubHub is OpenTable, a provider of restaurant-reservation solutions. In addition to sporting a similar business model, OpenTable's $1.8 billion market cap isn't too far from GrubHub's $2.7 billion market cap.
Over the same time span as GrubHub, OpenTable has seen its revenue rise only 36% from $139.5 million to $190.1 million. The difference between its growth and GrubHub's is likely due to the slower growth the business has seen in terms of customer count. Between 2011 and 2013, OpenTable's customer base rose just 64% from 96,674 to 158,107, about 10% the growth rate demonstrated by GrubHub.
From a profitability standpoint, though, the story is completely the opposite. As opposed to seeing its bottom line fall over the past three years, OpenTable's bottom line rose a respectable 55% from $21.6 million to $33.4 million. On top of benefiting from higher revenue, the company saw its cost of revenue fall from 28.2% of sales to 25.4%.
Bring on the big boy!
Another interesting business to compare GrubHub to is Groupon. At the end fiscal 2013, about 44.5% of Groupon's revenue came from goods sold and travel deals; the rest was derived from coupon-related sales through merchants. Over the three- year period, the company saw its revenue jump 60%, far outpacing the smaller OpenTable but not quite measuring up to GrubHub's success. It's customer base, on the other hand, grew at a much slower 33% from 33.7 million to 44.9 million.
But just as we saw with OpenTable, Groupon's strong growth stemmed from its willingness to take a loss. In 2011, the company booked a net loss of $279.4 million. While this may seem terrible, it should be noted that its net loss has since narrowed to only $95.4 million by the end of fiscal 2013.
Based on the data provided, it looks like investors can still grab a bite of GrubHub, but it comes at a significant cost. Right now, buying a piece of the business is very expensive, but nowhere near as expensive as OpenTable on a per-customer basis. Meanwhile, Groupon is the cheapest using this metric, but it comes with the downside of less growth potential moving forward and burdens investors because of its string of net losses year after year.
Taking all these things into consideration, the Foolish investor looking to buy a piece of any of these companies will have to make a trade-off between an expensive, high-growth business and a cheaper one with either smaller or negative profits. For the Foolish investor who can decide which aspect is more valuable in the long term, making a trade-off shouldn't be a problem. But for those who are uncomfortable with choosing one factor over the other, a better alternative might be to pass on all three companies.
Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends OpenTable. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.