The S&P 500 hasn’t had a great week and things have been even worse for tech stocks. But things have been downright ugly for relatively young tech stock Grubhub Inc (GRUB) in particular. In the last five days alone, Grubhub has lost roughly 10% of its value, while the stock has sunk almost 28% since first hitting the public markets in 2014.
GRUB, for those not familiar, is essentially a food delivery app. Online or on your phone, Grubhub allows you to order directly from around 40,000 takeout restaurants in over 1,000 cities in both the U.S. and London.
While the concept of food delivery is hardly new, GRUB’s tech-first approach is a bit more revolutionary. The company is not just one of the first and most well-known players in the space, but it’s definitely one of the first with a substantial enough business model to please Wall Street.
Why Being First Hasn’t Paid Off for GRUB
Unfortunately, being first to market has been a double-edged sword thus far. Grubhub reported first-quarter earnings this week, and while results actually topped the consensus for both sales and earnings per share, investors still fled in droves. After the report, GRUB stock opened to 3% losses.
Confused? Well, the thing with young tech stocks is that they come with big-time growth expectations. And on that front, Grubhub wasn’t a total disappointment. Q1 revenue of $112 million represented a 27% year-over-year increase, while EPS of 20 cents per share was exactly what Wall Street predicted.
Unfortunately, that 27% sales increased represented a growth slowdown for Grubhub, which is especially unfortunate in the midst of an uncertain market that has bred picky investors.
And even more unfortunate, the reassurance GRUB’s CEO offered raises more questions than answers. CEO Matt Maloney said the slowing sales growth was thanks to “the comparably slow market conditions in geographical areas other than New York,” as Bidness succinctly summarized, since food delivery is “still a developing concept in most areas of the country.”
While a developing concept might sound nice as a mega-trend and tailwind to send GRUB stock higher, such talk can be translated in a more negative way as well — especially in the world of tech. While Grubhub is early to market for food delivery, there are plenty of competitors right on its tail. And they’re not small fish.
Amazon.com, Inc. (AMZN) is building infrastructure for food delivery of all types. Yelp Inc (YELP) has Eat24. Uber has UberEATS. And plenty of more niche startups are tweaking and improving the concept as we speak.
This competition cannot be understated and is especially worrisome when slowing growth is already apparent.
Perhaps the cherry on top is the recent Morgan Stanley downgrade, which was dramatic. The firm downgraded GRUB stock to Overweight from Equal-weight and slashed its price target to $30 from $37, despite the company’s many bullish features.
The way I read it, it means such features are already built into the share price, so while there may be more upside, this new market is far more unpredictable than expected. And it is only going to continue getting more crowded.
Grubhub is quite the gamble, has quite a lot of competitors to fend off and now has a nice hole to dig out of. The stock may not be done for good, but it’s best to get more tangible proof of progress before going long.
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.
