Earnings reports can make or break a stock in the short-term — especially if companies aren’t hitting their marks. This quarter, the Street has shown no mercy, and GrubHub (GRUB) is the latest name to fall victim to the swinging axe of earnings season.
I recommended the stock back in mid-September in my GameChangers service because I was impressed by the company’s rapid growth. Revenue was up 47% in the second quarter, thanks to consumers appreciating the convenience of having meals from a wide choice of local restaurants delivered to their doors. Valuation wasn’t cheap then at 32x 2016 EPS, but the predicted future EPS growth rate of 20% or more meant the stock was a solid pick.
In early October, competitive concerns weighed on the stock, as Amazon (AMZN) announced it would offer its own restaurant delivery service to Prime subscribers in Seattle, and Uber also has a meal delivery service that continues to expand in some cities. I knew that earnings would see a lot of scrutiny given the tough playing field, so when shares began to bounce back amid a short squeeze, I pounced on the opportunity to lock in a nice 8% return and left the stock behind — just in time, too.
GrubHub Stock Got Punished
GrubHub ended up reporting earnings of $0.08 per share for the third quarter, missing analysts’ estimates for the company by $0.06. Revenue wasn’t as ugly, coming in at $85.7 million, but still missed consensus by about $1 million. CEO Matt Maloney tried to assuage investors’ fears by pointing out that the company had seen improvements in diner frequency and order growth — but the Street wasn’t having it and the stock fell off a cliff, plummeting as much as 30% before finding a bottom and making miniscule gains yesterday.
Thus, the pattern for this earnings season emerges: any company reporting less-than-perfect numbers is being punished, sometimes severely. In this case, GrubHub needed to redirect its assets to additional investments, such as boosting the efficacy of its new delivery service — the cost of which was quantified as “greater than expected” by CEO Maloney. Expenses soared 47% last quarter alone, which outpaced revenue growth of just 38%.
That unexpected increase in spending was necessary for GrubHub to stay afloat among fierce competition, but reduced forward earnings by quite a bit. GrubHub was forced to lower its revenue forecast for the fourth quarter to $98 million-$100 million versus analysts’ expectations of $100.9 million, and investors got spooked.
Now, there’s a lot of talk about a low-risk market with the Fed on our side and the economy doing just fine, but the great run in stocks over the past six years has left many individual names vulnerable. I think GrubHub has seen the downside of that. With good growth stocks being a scarce commodity, the limited names are forced to obscenely high valuations. And of course, what goes up must eventually come down, even if it ultimately goes back up.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
