Well, we can safely say that the GrubHub (GRUB) IPO didn’t have a demand issue.
The GrubHub IPO went live today, and even before the deal was pulled off, the company bumped the price range to $23 to $25 per share of GRUB stock, from $20 to $22.
And that still was too low.
Then as soon as the GrubHub IPO hit the markets, GRUB stock shot up another 40%.
If there’s a recipe for successful offerings, the GrubHub IPO certainly had all the right ingredients.
For one, the company is a huge beneficiary of the mobile wave. The company has apps for both Apple (AAPL) iOS and Google’s (GOOG) Android operating systems … and they’re getting used. From the fourth quarter of 2011 to the same period in 2013, orders from mobile apps exploded from 20% to 43%. (Heck, there are even 76 mentions of “mobile” in GrubHub’s S-1).
Another key attraction of the GrubHub IPO: the huge market opportunity. See, GRUB focuses on independent restaurants, which typically do not have the resources (such as mobile technologies, analytics systems and online ad campaigns) to offer online takeout services. But these restaurants still realize that takeout can offer a big jump in revenues without having to add inventory, seating capacity and wait staff.
And according to the GrubHub S-1, that market opportunity in the U.S. alone is a whopping $67 billion.
GrubHub makes its cut by charging a commission for each order, not up-front fees.
So far, GrubHub is the biggest player in the market. In all, GrubHub has a network of 28,800 restaurants across 600 cities and processes more than 135,000 daily average orders. In 2013, the company booked revenues of $137.1 million, which were up about 67% from the prior year. Plus, GRUB was profitable, earning $6.7 million, and tallied $38.1 million in adjusted EBITDA.
All in all, the issuance of GRUB stock will be crucial for keeping up its growth. GrubHub has been an active acquirer, with the biggest deal coming last year when it purchased Seamless. Between the cash from the offering and its stock, GrubHub can ramp up dealmaking — especially important because we’ll potentially see competition from mega operators like Google. In fact, Yelp (YELP) recently formed a partnership with Eat24.com to enter the takeout market.
A few factors could damper some of the GrubHub IPO momentum, however. For instance, so far, several red-hot Internet deals have had major dropoffs:
|Company||Ticker||First-Day Return||Return After First Day|
At the same time, there has been a broader correction in broad Internet/social sector, which might indicate that valuations have hit frothy levels. We’ve seen declines of 20%-plus in the past month alone in Yelp, Zynga (ZNGA) and Pandora (P).
What’s more, as the overall U.S. economy improves, Wall Street appears to be rotating money into cyclical and value stocks.
And, as should be no surprise, GrubHub is far from cheap. At current valuations, GRUB stock is trading at roughly 21 times sales and 418 times earnings.
In light of GRUB stock’s big first day and the recent poor aftermarket performances of several Internet IPOs, it’s probably a good idea to hold off on the GrubHub IPO for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.