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Why GrubHub, Inc. Shares Sizzled Today

By Anders Bylund - Jul 28, 2015 at 1:31PM

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On the heels of a painful analyst downgrade, GrubHub hit second-quarter results out of the park. What's next?

Image source: GrubHub.

What: Shares of restaurant ordering service operator GrubHub (GRUB) jumped as much as 17.9% higher on Tuesday morning. That spike evaporated quickly, replaced by a plunge to 6.4% below Monday's closing prices. But that didn't last long either. GrubHub shares were trading up 9% at 2:30 p.m.

So what: The volatility started Monday when GrubHub stock plunged 10%, following an analyst downgrade with lowered target prices and pessimistic comments about rising competition. So when the company reported second-quarter earnings on Tuesday morning, it did so against a backdrop of very recently lowered expectations.

In that report, GrubHub beat analyst targets on both the top and bottom lines. Management also raised guidance for the coming quarter and full year. Now, that negative analyst note from Monday suddenly looks stale.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Now what: GrubHub's second-quarter sales rose 47% year-over-year to $88 million, which compares well to Wall Street's $85 million consensus. On the bottom line, adjusted earnings jumped from $0.07 to $0.17 per share, again ahead of the $0.13 consensus.

Looking ahead, management guided revenues to roughly $86 million for the third quarter and $361 million for the full year. Both figures are slightly ahead of current analyst views.

The company now counts 5.9 million customers as "active diners" up 42% from $4.2 million in the year-ago quarter. On the heels of several plug-in acquisitions of local delivery services, about half of these active diners now have access to GrubHub delivery options.

Cowen & Co analyst Kevin Kopelman, who issued that sour research note on Monday, still wasn't impressed. In Kopelman's view, GrubHub simply confirmed that its organic growth is slowing down. "We remain concerned about slowing growth amid heavy competition," he said in a new research note to investors.

All told, GrubHub shares now trade 2% below the opening price from its April 2014 IPO. However, the share price also stands at 92 times trailing earnings. It's a classic high-growth bottle rocket, with all the potential growth and execution risks that moniker implies. The second-quarter report didn't change that, nor did Cowen's analysis. I'd suggest adding GrubHub to your Foolish watchlist for further research, because both the business and stock look very unpredictable so far.

Anders Bylund has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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