It’s been a rough year for U.S. food delivery giant GrubHub (NASDAQ:GRUB), as GrubHub stock has tumbled amid concerns about escalating competition, slowing growth, and eroding profitability. But, while things were bad for GRUB before, they just got a lot worse.
In late October, GrubHub reported third quarter numbers that missed estimates across the board. Growth slowed meaningfully. Margins took a big hit. Profits dropped. Even worse, the fourth quarter guide came in well shy of expectations, calling for revenue growth to slow even more significantly, and for margins to keep dropping.
In response to the awful third quarter earnings report, GRUB stock dropped 40%. Shares now trade hands below $34, their lowest level since April of 2017 and nearly 80% off their late 2018 highs.
Contrarians will step in here and say that GRUB stock looks like a compelling buy on the dip. They would argue that the stock is cheap and oversold, the secular growth tailwinds in the online food delivery market remain healthy, and that profitability will improve once the competitive landscape rationalizes.
To an extent, those contrarians are right. But, they are also wrong. GRUB stock is cheap, oversold, and things should get better; however, GrubHub stock likely won’t rebound anytime soon, because things won’t get better anytime soon, either.
The investment implication? Avoid the falling knife that is GrubHub stock, for now. Wait for growth trends and margins to stabilize before buying the dip. Until then, regardless of how cheap the stock gets, it will be too risky to touch.
Earnings Confirm a Scary Slowdown
GrubHub’s third quarter earnings confirmed that this company is getting killed by competitive forces, and that those competitive forces are causing a scary slowdown in the food deliverers’ growth narrative.
The writing has been on the wall here for a long time. GrubHub leveraged first mover’s advantage in the online food delivery market to capture 70% share in its early days, and rode that leading market share in a secular growth market to 35%-plus revenue growth rates from 2014 to 2018. At the same time, because competition was relatively muted, margins were healthy and stable, and profit growth was similarly in the 35%-plus range.
Big revenue growth plus big profit growth led to a surging GRUB stock. From early 2016 to late 2018, GRUB stock soared from $20 to $150.
But, the competitive landscape in the food delivery market has changed dramatically over the past few years. New entrants came into the market, like DoorDash, Postmates, and Uber Technologies’ (NYSE:UBER) UberEats. At first, those new entrants took some market share at a gradual pace from GrubHub — but GrubHub remained the undisputed king. Then, those new entrants got more aggressive, ran more promotions, and put more money into marketing. Their share gains quickened. GrubHub’s market share eroded rapidly. And, by 2019, GrubHub had lost its title as the king of the food delivery market. Today, the company controls only 30% share.
The financial implications of this? Revenue growth slowed from market share erosion. Operating expenses ballooned as management tried to fight off competition. It didn’t work. Revenue growth kept slowing. Margins dropped. Profits got wiped out. GRUB stock collapsed.
Net net, the absence of competition pushed GRUB stock to $150 and too much competition has dragged it down to $35.
GrubHub Stock is Cheap, but Still Risky
At $35, GrubHub stock is cheap. But, with competition ramping up, the revenue growth trajectory significantly decelerating, and margins in retreat, GRUB stock is also still very risky.
Back in late 2018, GRUB stock was fetching an 80x forward earnings multiple. Today, the stock trades at just 27x forward earnings — which is its cheapest valuation, ever. The same is true across all major valuation multiples. Broadly, then, GrubHub stock today is as cheap as its ever been.
But, the fourth quarter guided revenue growth rate is 13%. From 2014 to 2018, the average revenue growth rate at GrubHub was above 40%. EBITDA is expected to get cut in half next quarter. From 2014 to 2018, the average EBITDA growth rate was also above 40%.
In other words, GrubHub stock is cheaper today than ever before because the growth narrative here is weaker today than ever before. Thus, the stock isn’t on sale … it’s trading exactly where it should be.
To make matters worse, the competitive landscape isn’t easing up, so unless GrubHub does something drastic, the implication is for revenue growth rates to continue to slow, margins to continue to drop, and profits to continue to decline. So long as those three things keep happening, GRUB stock won’t rebound.
Bottom Line on GRUB Stock
Third quarter earnings confirmed that competition is killing the GrubHub growth narrative. So long as this remains case — and so long as the growth trajectory keeps flattening out, margins keep retreating, and profits keep falling — GRUB stock will not rebound.
At some point, given the secular growth tailwinds in the online food delivery market and GrubHub’s commanding share in that market, one can reasonably expect the growth narrative to stabilize. At that point, stabilization will spark a big rebound in GRUB stock.
But, that likely won’t happen soon, and until it does, GRUB stock will likely remain weaker for longer.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.