Grubhub (GRUB) is currently priced around $65 per share. The stock is down about 30% across the past couple quarters as investors have grown concerned about slowed growth, lost market share and increasing expenses. Uber Eats and DoorDash are chewing into Grubhub’s market share. To the delight of investors, the stock bounced back after surpassing first quarter expectations. Let’s take a look at whether Grubhub is worth owning.
Grubhub has emerged as the nation’s top digital platform for placing delivery/take-out food orders. The company is poised to benefit from the massive migration to the web. As more and more people use computing devices to connect to the internet, companies like Grubhub will experience a dramatic increase in business. From the customer’s perspective, ordering online is easy, quick and convenient. There is no need to interact with a human being who might be awkward and/or make a mistake on the order. Grubhub also presents value in that it can pick up items from several restaurants for the delivery of a truly diverse array of culinary offerings.
All in all, Grubhub has nearly 18 million active customers. The company averages nearly half a million orders per day. Each of these figures is up about 20 percent from the year prior.
Grubhub jumped right back up after a steady decline thanks to its better-than-expected first quarter numbers. Grubhub’s revenue is up nearly 40 percent for the year, reaching the $323 million mark. The company also beat non-GAAP earnings per share by a full five cents. Some investors are questioning whether these superb numbers are an indication it is time for Grubhub bears to become Grubhub bulls. Grubhub’s active diner growth is on the rise partially because the company partnered with Yum! Brands to deliver Taco Bell to the masses. The company also has a popular platform for college campuses known as Tapingo.
Grubhub investors were initially unsure of what to make of the company’s acquisition of LevelUp. The payment and service specialist was brought into the Grubhub fold last year to form an all-in-one platform for eating establishments. This tech empowers clients to handle everything from deliveries to in-store orders, pickups and more. In fact, emerging trends can be identified based on platform activity, providing valuable insight that competitors like Uber Eats and DoorDash simply cannot match. It is possible Grubhub will one day go up against the likes of Square (SQ) that groups food delivery, payments, management tools and additional services for easy use.
If Grubhub has a glaring flaw, it is the company’s operating expenses. Grubhub is spending massive amounts of cash expanding its logistics network, marketing campaigns and overarching digital network. This arguably excessive spending is partially the cause of the fourth quarter earnings decrease. Company executives deserve credit for limiting spending in the first quarter, yet company costs and expenses are up nearly 60 percent for the year. All in all, company costs and expenses equal 97 percent of revenue. Rewind time to this point on the calendar in 2018, and Grubhub’s costs and expenses were a 86 percent of its revenue.
Grubhub executives will have to find a way to reign in spending on marketing. The company’s marketing costs have increased 61 percent to just under $80 million. Furthermore, elevated order volume has caused operations/support expenses to increase nearly 70 percent. Grubhub should consider reducing spending on marketing in the quarters ahead, gauge how it impacts sales and move forward accordingly.
Even considering this, we’re calling Grubhub a buy for stock investors. Grubhub is likely to increase or at least stagnate around the $60 level in the months ahead. It appears as though the masses are more than willing to use Grubhub, yet the company’s business model might not prove fruitful in the long run. Between the potential for higher gas prices, food delivery challenges and the rise of competitors such as DoorDash, Grubhub has plenty of potential stumbling blocks. However, there is significant investor interest in this company for good reason: it provides a service that is currently in demand. The question is how long Grubhub will be able to maintain healthy profit margins and whether the business can dominate this emerging space.
If you own Grubhub, maintain your position. Investors unafraid of risk should consider a position in Grubhub at its current price. Everyone else should watch this stock closely to see if a buying opportunity presents itself in the near future.