Recommendation: SELL
Summary:
As a result of Grubhub’s (GRUB) competitive landscape, worsening margins, and slowing growth gives me concern about the company’s future outlook.
Competitive Landscape:
DoorDash, and UberEats, are just a few of the strong competitors that Grubhub is facing.
Starting off with DoorDash (DOORD), it recently announced that it was going to be injected with $100 million in additional funding, which would put its post-money valuation at $13 billion. This news sent both Uber and Grubhub’s stock down, -1.6% and -1.4% respectively. This tells me that investors have taken notice and are maybe looking at DoorDash as being the new king of delivery services. This is not a coincidence, given that DoorDash controlled 35% of the U.S market, while Grubhub (30%) and UberEats (20%) were well behind. This graphic from CNBC gives us a better look at more specific areas within the U.S. and how these companies stack up.
Additionally, DoorDash grew 114% from October 2018, which was the most of out all the delivery services, and was well above the 40% increase in the market. It is looking more and more likely that DoorDash will leave Grubhub behindt.
As for UberEats, it is important to take note that its revenue rose 80% in the first six months of the year, versus Grubhub’s 36%. Not a good sign that its top competitors are growing at a faster rate than GRUB, which prided itself on its growth.
Margins:
Delivery is a low-margin business already, and add that to the fact that restaurants are increasingly pushing back on the fees associated with the food delivery. This is forcing more providers to cut deals to keep restaurants using their platforms. As a result, margins are being pushed down. Most notably, Grubhub has partnered with Shake Shack Inc., and McDonald’s to a greater extent, in order to grow its business.
With increased competition, this means that the customer loyalty that they once enjoyed has dissipated, and GRUB have admitted that themselves. This then leads to GRUB having to offer more discounts, which again, drops margins.
I expect that as competition increases, and as more restaurants seek deals, GRUB’s margins will continue to suffer.
Growth:
Grubhub themselves argue, in a letter to their investors, that growth in the food delivery space will slow down. No longer will the market grow in crazy proportions, rather it will see moderate growth. This, if true, would not only hurt Grubhub, and UberEats, but its private counterparts in DoorDash and Postmates.
Could this be a result of incompetence on the part of Grubhub? Perhaps. Either way it is not a good sign for the future of the company.
Something to take note of is the fact that the daily average grubs growth rate was 10% in this latest quarter, down from 37% in the year-ago period. Not a good sign for GRUB.
Conclusion:
For the reasons stated above, I do not trust Grubhub and would sell long-term
Key Notes:
Wedbush Securities cut GRUB’s target price from $90 to $30
In addition, seeing that Cowen Inc. slashed the target price from $86 to $36 is a huge red flag in my opinion.
