GrubHub Inc (NYSE:GRUB) stock has been a big winner recently. Last Friday, GRUB stock closed at an all-time high right around $48 per share. That is up about 50% from where the stock traded in late March 2017.
The catalyst? A massively positive Q1 earnings report at the end of April, which largely muted competitive concerns.
Into that report, GRUB stock was getting killed as competition heated up in the online and mobile food ordering and delivery marketplace. But GRUB smashed Q1 estimates and investors forgot about those competitive concerns. The market sentiment was that GrubHub was still the king of its space.
But that sentiment has quickly changed in just the past few days. Competitive concerns rushed back to the forefront on Sunday night when Morgan Stanley downgraded the stock to Equal Weight and slashed its price target by $4 to $43. Analysts argued that Amazon.com, Inc. (NASDAQ:AMZN) and Uber are beginning to eat away at GRUB’s market share.
GRUB stock dropped over 6% on Monday.
And when it rains, it pours. Monness Crespi reiterated its Sell rating on the stock on Tuesday, saying GrubHub doesn’t have a defensible position in the space. GRUB stock dropped another near 3% on Tuesday.
But the stock is rebounding today after Pacific Crest reiterated its Overweight rating and said that the recent competitive concerns are overdone. GrubHub is up about 1.6% so far today.
Clearly, analysts are in disagreement about this stock, but who is right?
Well, they are all right to some degree. Here’s why.
GrubHub Is a Great Company, But the Stock Is Risky
GrubHub has a lot of competition, but that’s nothing new. Postmates, UberEats and Amazon Restaurants are just a handful of many other players that accompany GrubHub in the online food ordering and delivery marketplace. But they have all been around for some time.
As illustrated by the company’s Q1 results, GRUB has displayed an impressive ability to brush off this wave of competition. Q1 represented the company’s best quarter in history in terms of both organic Active Diner net adds and restaurant adds. New restaurant adds included headline names like TGI Fridays, Chili’s, Maggiano’s and Rubio’s Coastal Grill. GrubHub also expanded partnerships with big restaurant chains like Denny’s Corporation (NASDAQ:DENN) and Buffalo Wild Wings (NASDAQ:BWLD).
The number of markets with Daily Average Grub volume in excess of 1,000 grew from 22 to 28, 30% sequential growth. The core user base remained particularly sticky, as Active Diners acquired in January 2013 placed more orders on the platform in March 2017 than they did in March 2016.
So, clearly, recent data seems to support the bullish Pacific Crest thesis. Consumers and restaurants alike are flocking to the GrubHub platform in greater number than ever before. Geographic expansion is happening at a rapid rate. Once consumers use the platform, they stick to using it. Overall, competitive concerns do seem to be overblown.
But at the same time, competition is heating up. Amazon Restaurants is gaining in popularity, as 26% of Prime members have used Amazon Restaurants in the past 6 months. Meanwhile, DoorDash, Postmates, and UberEats have all quickly ascended in popularity, and are now commonly used by many Millennial consumers.
So Morgan Stanley and Monness Crespi are also right. There are undoubtedly clear warning signs that GrubHub could lose market share in the future.
So what’s really going on?
Well, everything is going digital, and that includes more than just shopping for clothes. Simply observe the correlation between Domino’s Pizza, Inc. (NYSE:DPZ) and Netflix, Inc. (NASDAQ:NFLX) to understand that online food ordering and delivery is a booming trend. Simply, the marketplace is growing at a rapid rate.
Indeed, its growing fast enough that all these competing platforms are growing together without rubbing elbows.
But how long can that last? And how much can GrubHub defend its leadership position once market growth starts to flatten?
Those questions don’t have answers yet, and that makes GRUB stock particularly risky at these levels.
Bottom Line on GRUB Stock
GRUB stock trades right around 31-times next year’s consensus earnings estimates. Meanwhile, the Street is looking for compounded earnings growth around 20% over the next 5 years. A 31-times forward multiple for 20% growth isn’t great, especially considering that there are plenty of risks to that 20% growth rate.
If growth is more like 10-15% due to competition eating market share, then GRUB stock is grossly over valued here. If its 20%, then the stock feels fairly valued. Either way, I really don’t think there is huge upside to this stock from a $44 base.
Analysts can’t seem to agree on the future of GrubHub, but there is a lot of growth baked into GRUB’s valuation.
That makes the stock particularly risky here. I think its best to stay away.
As of this writing, Luke Lango was long AMZN and NFLX.