Grubhub Has Some Finicky Investors

Grubhub


GRUB -12.29%

ate its meat but still doesn’t get any pudding.

The online food-delivery giant reported a solid second quarter on Tuesday, with revenue topping Wall Street’s estimates and adjusted earnings before interest, taxes, depreciation and amortization coming in line with consensus expectations. Earnings guidance for 2019 was lukewarm, however, as Grubhub tightened it to the low end of the range it gave in the previous quarter. Investors sent the stock down more than 12% in morning trading.

The selloff doesn’t so much reflect disappointment over that guidance as nervousness about the toll of competition in food delivery. Coming into earnings, Grubhub’s stock already was down roughly 50% from last September’s high as the company has ramped up investments in new markets and drivers to compete with rapidly growing competitors such as DoorDash and Uber Eats. Still, the new guidance implies roughly $1.50 in profit per order by year-end. That is up more than 50% from profitability per order in the fourth quarter of 2018.

Grubhub continues to grow in this crowded market. Management said on a conference call with investors that it added 1 million net active diners and a record number of independent restaurants, despite a seasonally slow quarter. Significantly, it said it added hundreds of independent restaurants in New York City, a core market, after coming under fire from local officials for its high commission rates. And while some chain restaurants reportedly have been opting out of Grubhub’s delivery service citing unfavorable economics, executives said in an interview with The Wall Street Journal on Tuesday that attrition is as low as ever.

Big swings following earnings are a regular menu item at Grubhub. According to D.A. Davidson & Co., since going public in 2014, Grubhub’s stock has moved by more than one-tenth some 43% of the time and more than one-fifth some 24% of the time during the session following earnings.

The question is where Grubhub’s stock will bottom. At four times enterprise value to next year’s forecast sales, Grubhub is already trading at a significant discount to September highs of 11 times, despite continuing to post revenue growth of more than 35% in a seasonally slow quarter.

It is worth noting that DoorDash, the largest private player in the industry, recently raised money at a $12.6 billion valuation—nearly double that of Grubhub’s current market capitalization of just over $7 billion.

Grubhub’s guidance suggests it will continue to grow in the second half of the year. And while the industry appears increasingly ripe for consolidation, there is little risk Grubhub won’t still be serving when the dust settles. Even with new options on the menu, Grubhub is likely to remain a staple. Its price looks more appetizing by the day.

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