It shouldn’t be surprising that there is a food fight in the stock market over
While the online food-delivery market continues to grow impressively, so does competition. Many restaurants initially felt they had no choice but to add online delivery or die. Now, however, resistance may be less futile, alleviated by negative media coverage and the possibility of regulatory action. Investors largely seem confident that food apps will continue to race ahead but they are less sure about which horse to bet on.
Over the past two months, the New York Post has cataloged some of Grubhub’s issues, including erroneous charges to restaurant customers, the employment of “fake” listings and the potential for commission-rate caps. Grubhub has denied some of the Post’s claims, including its alleged use of “cybersquatting,” or bad-faith registration of another person’s trademark in a domain name.
Several banks, including Stifel and BTIG, dismissed the Post’s reports as noise, viewing weakness in Grubhub’s stock as a near-term buying opportunity. Still, beyond claims specific to Grubhub, regulatory issues could weigh on the rapidly growing sector as a whole.
Grubhub’s stock performance has been, to put it mildly, choppy over the past 12 months. Shares rose to a record just last September but have since dropped 50% as competition has threatened the company’s market lead. Meanwhile, DoorDash has raised $1 billion this year alone; Postmates filed for its initial public offering in February; and Uber went public in May. The ride company, which runs Uber Eats, not only raised an eye-popping sum but in its filings also shed light on just how high the cost of acquiring new eaters could climb amid formidable competition.
While Grubhub’s stock price has recovered since a trough in May, alongside strong performance from the tech sector overall, there are plenty of skeptics. Grubhub’s short interest as a percentage of free float is now over 20%, according to FactSet, climbing steadily from just over 4% in September. For comparison, Uber’s short interest is under 5%, despite the fact that it faces stiff competition.
Heading into its earnings report Tuesday, it is hard to know whether even a solid quarter could force bearish investors to cover. After Grubhub reported first-quarter results, the stock sold off 3%, despite posting 39% annual revenue growth, as profitability declined year-over-year as a result of increased investments in growth. The second and third quarters are seasonally less strong for the business, and analysts are predicting second-quarter sales to be the weakest of 2019.
Despite competitors’ heavy spending, Grubhub still managed to expand restaurants served by 16% from February to June, according to KeyBanc. Moreover, recent restaurant additions may be a signal that formal partnerships with some of the largest U.S. chains such as McDonald’s and
could be on the horizon, according to Mark May of Citi Research.
Still, with competition and controversies heating up, investors may want to skip the next few courses.
Write to Laura Forman at email@example.com
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