Highlights From GrubHub’s Quarterly Earnings Report

GrubHub (GRUB) reported a generally uplifting first quarter recently, with growth in its most important segments. 

In this clip from the Market Foolery podcast, Mark Reeth and Jason Moser go over how the company did in the quarter and where GrubHub sits in the online delivery space. What is it that sets it apart from other similar services? As delivery is almost a commodity at this point, and it's a business with low barriers to entry, how can GrubHub hold onto the edge it has now -- especially with some bigger, better-financed companies eying what is expected to become a $70 billion industry?

A transcript follows the video.

This podcast was recorded on May 3, 2016.

Mark Reeth: Let's move on to GrubHub, which also announced earnings earlier. Bit of a mixed bag here. Quarterly revenue was up, net income was down. What's your takeaway from the earnings report from GrubHub?

Jason Moser: I think the crucial part of the equation for anyone looking to compete in this market is, it's all going to revolve around customer service. This is a customer service deal right here. When you're having your food delivered, you want two things -- you want it in a timely fashion, and you want the right order. If you miss out on either one of those, it really creates a bad experience, and you're not as likely to use that service again.

This is a really interesting space, because this is what GrubHub does. This is the advantage that they have. This is what they do. So, when you look at the competition in this space, something like Amazon, for example, in their Prime offering now, they are getting more into this space. I'd worry that Amazon ...

Reeth: It's Amazon?

Moser: (laughs) The mandate of the business, the mission of the business, is to be the most customer-centric company on the face of the Earth. On the flip side there, you look at other competitors like Uber, Postmates, DoorDash ... I'm a little bit more on the skeptical side as far as Uber being able to incorporate this into their model and being as effective with it. I think Uber does something very well in getting people from point A to point B. I don't know that it's necessarily as easy to leverage that infrastructure and throw food into the mix. It could ultimately work out for them. But again, I think, it's not their specialty. It's not what they do. 

We are seeing partnerships with companies like Postmates. I think Postmates is the one that's partnering with Chipotle. And I'm sure that more and more partnerships like that will shake out. But, GrubHub went public at a very good time. Now they're there. They have that funding, and they're out there. All these others are still private, with the exception of Amazon, so they have to deal with raising more and more capital and building out the business.

There are a lot of attractive qualities, I think, about GrubHub. This is kind of a pure play. It's a big market opportunity. You have some estimates out there of a $70 billion takeout market here domestically. Now, that's not their market opportunity, but they'll measure total food sales, and their revenues are going to be a part of those total food sales. All of the metrics are trending in the right direction. They have a solid balance sheet. They're profitable, they're cash-flow positive. Shares are actually trading at a semi-reasonable level at 32 times full-year non-GAAP estimates. So, it's not like it's really all that outrageous of a stock right now. Yeah, it's going to be a very competitive environment, for sure, but ...

Reeth: Actually, I want to come back to that. You mentioned this right at the top. In fact, you actually said something about The New York Times earlier that I wanted to go back to as well. You talked about information vs. brand, and how in the news industry, brand used to be everything, and now information is everywhere, so brand has become less important. I kind of feel like it's almost the same thing here with GrubHub and its competitors. That's what you were talking about at the beginning of this portion of the show. 

I've used GrubHub. I used it this past weekend. I also usedEat24, which is a Yelp (YELP 1.18%) product. I think I used that two weeks or so ago. In case you didn't know, I am about 75% of this market. The eat-in market is all me at this point.

Moser: (laughs) There you go.

Reeth: But, in my mind, the two are interchangeable. Even in terms of offerings, of the different kinds of food out there, even in terms of service and delivery times and everything. To my mind, there's not much differentiation between brand or information at this point. You can get food from anywhere, any of these different services out there. If I can call an Uber from a bar and have them have a pizza in that car on my way home, that's the golden ticket right there, that's beautiful. 

I guess, what it comes down to for me -- and maybe there is no correct answer here -- but what differentiates GrubHub? Why GrubHub over all the others? Again, their business sounds great. You've been giving us some great numbers here. It doesn't sound like GrubHub is a bad investment. Just, is there a moat? Is there any way for it to distinguish itself from the competition?

Moser: I think the quickest way to building any kind of a moat is to have the biggest network. I think, with any of these businesses, having the biggest network is going to be a great way to separate yourself from your competitors. Whether I'm in Georgia or California, I could use GrubHub, and I'll find a large selection of restaurants where I can get basically whatever I want. Ultimately, yeah, you're looking for the food first, and how do you get it is going to be secondary. Back to the newspaper conundrum there, I think you're going to see consolidation being a part of this industry as well. GrubHub, which also owns Seamless, and they just made another acquisition here of a Los Angeles-based delivery service.

Reeth: LABite.

Moser: I think we're going to see a lot of networking here early on. It's kind of the Wild West right now. That's going to be, I think, the biggest advantage. And I think that's an advantage that GrubHub certainly has over other businesses that haven't been able to go public yet, because they're going to be a little bit more constrained financially. And as your network grows, those network effects start to take place, other restaurants see you as being the company with the biggest network and the most reliable service. Then, you can develop a brand from that. They kind of work together. I think it's going to be building that network out. And the faster they can do that, the more of a competitive advantage, or at least some sort of a moat, they'd be able to develop.

And after that, really, it just becomes about execution, making sure you're providing that great service, and making sure that you really are focused on that. It's easy for companies to be customer-centric in the early years. It's another thing to really sustain that behavior and grow it. Customer service is one of those things that's difficult because it's really not so scalable. You're looking for that human interaction, which is why I'm generally a bit skeptical of these bots we hear so much about. I think they can provide certain things, like, you could find out the hours a restaurant is open, perhaps. But, if you're having an issue with a service, you're probably going to need to interact with a person. I think that service, again, is going to prove out to be a very important dynamic to this market.