Should Investors Sell Grubhub at Its Two-Year Low?
Grubhub's (NYSE: GRUB) stock recently plunged to a two-year low after the meal delivery company's third-quarter numbers missed analysts' expectations. Its revenue rose 30% annually to $322.1 million, but that marked a slowdown from previous quarters and missed expectations by $7.4 million.
On a GAAP basis, Grubhub's net income plunged 96% to $1.0 million, or $0.01 per share. On a non-GAAP basis, which excludes stock-based compensation and other one-time charges, its net income fell 41% to $24.7 million, or $0.27 per share, which missed expectations by a penny. Its adjusted EBITDA dropped 10% to $53.8 million.
Image source: Getty Images.
Grubhub's slowing growth indicates that it's struggling against rivals like DoorDash and Uber (NYSE: UBER) Eats in a highly competitive market. Therefore investors might be wondering if it's finally time to dump Grubhub and buy more promising growth stocks instead.
Another quarter of decelerating growth
Grubhub measures its growth in daily average grubs (meals), gross food sales, and active diners. All three figures consistently rose by the double digits over the past year, even if they're decelerating.
|YOY growth||Q3 2018||Q4 2018||Q1 2019||Q2 2019||Q3 2019|
|Daily Average Grubs||37%||19%*||19%||16%||10%|
|Gross Food Sales||40%||21%||21%||20%||15%|
YOY = Year-over-year. Source: GrubHub quarterly reports. *22% excluding Eat24 from both periods.
Grubhub's growth in daily average grubs decelerated significantly during the third quarter, and will likely drop to the single digits over the next few quarters.
Grubhub mainly attributes that slowdown to growing competition in the market and weaker loyalty rates among new diners. Grubhub previously scaled up via a long list of acquisitions, which bolstered its inorganic growth, but it's running out of smaller players to acquire.
DoorDash also surpassed Grubhub as the top meal delivery service in America earlier this year, according to Second Measure, and claimed 34% of the market in September, compared to Grubhub's 30% share. Uber Eats held 20% of the market.
The bears believe the escalating battle between these platforms for restaurants and diners will curb Grubhub's revenue growth and crush its margins. In its shareholder letter, Grubhub admits that "the easy wins in the market are disappearing a little more quickly than we thought." That struggle is reflected in Grubhub's horrendous bottom-line declines over the past year.
|YOY growth||Q3 2018||Q4 2018||Q1 2019||Q2 2019||Q3 2019||YOY growth||Q3 2018||Q4 2018||Q1 2019||Q2 2019||Q3 2019|
|Daily Average Grubs||37%||19%*||19%||16%||10%||GAAP net income||75%||(110%)||(78%)||(96%)||(96%)|
|Gross Food Sales||40%||21%||21%||20%||15%||Non-GAAP net income||72%||(47%)||(41%)||(46%)||(41%)|
|Active Diners||67%||22%||28%||30%||29%||Adjusted EBITDA||41%||(26%)||(21%)||(19%)||(10%)|
YOY = Year-over-year. Source: GrubHub quarterly reports.
Those declines dull Grubhub's sharpest advantage against DoorDash and Uber -- its profitability. DoorDash and Uber Eats are both unprofitable, so some bulls believe that Grubhub could outlast those rivals as the last man standing in a low-margin industry. But if Grubhub's bottom line dips into the red, it could be stuck in a brutal race to the bottom.
Bleak guidance points to future losses
Grubhub's guidance for the fourth quarter indicates that the situation won't improve anytime soon. It expects its fourth-quarter revenue to rise just 9%-16% annually, compared to Wall Street's expectations for 35% growth. It expects its adjusted EBITDA to decline 41%-64% annually during the fourth quarter, versus expectations for 88% growth.
Image source: Grubhub.
Grubhub warns that its orders will likely decelerate again, that it must spend more cash to gain more restaurants and diners, and that it's still providing free deliveries and promotional support to large enterprise partners like Yum Brands' (NYSE: YUM) KFC and Taco Bell, McDonald's (NYSE: MCD), and Panera Bread.
In other words, Grubhub is slipping into the dreaded trap of driving its sales growth with margin-crushing strategies. Grubhub expects its growth in daily average grubs to improve in 2020, but it also expects that expansion to impact its EBITDA growth.
Is it time to give up on Grubhub?
Grubhub didn't offer any formal guidance for 2020, but analysts previously expected its revenue to rise 26% and for its non-GAAP earnings to grow 56%. At $40, Grubhub's stock trades at about 20 times that earnings estimate.
However, analysts will likely reduce their EPS forecasts significantly after Grubhub's latest report, so that forward multiple isn't reliable. In terms of revenue, Grubhub looks cheap at about two times next year's sales -- but it trades at that discount because its growth is decelerating.
Investors shouldn't consider Grubhub's post-earnings drop to be a buying opportunity with so many headwinds on the horizon. Grubhub's current inventors shouldn't sell into the panic yet, but they might consider cutting some losses if the stock rebounds.
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