Restaurant takeaway service GrubHub Inc (NYSE:GRUB) has been a market darling for the past two years as investors buy up shares in what they hope will become the next Netflix, Inc. (NASDAQ:NFLX).
Like it or not, people prefer to stay home and let their entertainment come to them in today’s world. That’s what happened to retail with e-commerce, and movies have been suffering the same fate with the growing popularity of streaming. Now, GRUB stock is benefiting from speculation that the same is true for dining.
As an early mover in the space, GRUB has been able to sign on big-name partners like Yum! Brands, Inc. (NYSE:YUM), which has helped the company grow and attract attention among investors.
GrubHub also impressed the market with its latest quarterly results, boasting revenue growth of nearly 50%, while EPS rose more than 60%. Not only that, but GRUB is becoming more and more popular among stay-at-home diners, with the number of active users rising an impressive 77%.
So what’s not to love? Based on those figures, GRUB looks like a golden ticket as ordering in gains traction. But before you jump in with both feet, here are three factors to consider.
Factor #1: It’s Expensive
While it’s true that GrubHub stock is poised for impressive growth over the next few years, investors who buy in now are paying for that. GRUB is a relatively expensive stock because the company’s potential has been priced in at this point.
GrubHub has a P/E ratio of 148.65 and trades at 64 times its forward earnings. To put that into perspective, the S&P 500 has an average P/E of 22.87. Facebook, Inc. (NASDAQ:FB), a potential future competitor, trades at 23 times its forward earnings.
That’s not to say you shouldn’t buy GRUB, because the stock does likely offer impressive gains in the long term. However, it’s important to note that its valuation is starting to look stretched, and we might see a pullback soon, offering investors a better chance to buy in.
Factor #2: It Won’t Be Alone for Long
Another big reason traders are excited about GRUB is that it’s one of the only ways you can get in on the trend toward ordering restaurant food online. However, that is unlikely to last for long.
There are already a number of other, smaller competitors allowing people to order restaurant food for delivery — even Uber is building out a food delivery service. GRUB has taken a step in the right direction by creating an exclusivity contract with Yum!, but not all restaurants are willing to be exclusive with just one service.
Not only that, but many are expecting to see larger names like Amazon.com, Inc. (NASDAQ:AMZN) and Facebook start to get in on the action. That would be troubling for GRUB because their larger cash reserves would give them the ability to severely undercut on price.
Factor #3: Cost Concerns
Speaking of price, another worry for GRUB investors is the company’s ability to compete on price. GRUB will likely struggle as competition increases because the firm will eventually need to lower the transaction fees it collects from restaurants.
Right now GRUB charges between 13% and 16% for every order placed through its platform, but that might have to change as the field becomes more crowded.
Very few of the restaurants outside of the Yum! umbrella are exclusively linked to GrubHub. That means that if another player were to come along and offer to place orders for less, GRUB might find it difficult to hold on to its contracts.
This kind of pressure is especially likely if a company like Amazon enters the mix. The e-commerce giant might decide to create a food delivery service as an add-on for Prime members. That means Amazon would collect subscription fees from users, making the transaction fee with restaurants less important.
The Bottom Line on GRUB Stock
GRUB stock is certainly an interesting opportunity, and if the stay-at-home trend continues, it could be a great way to play the food-delivery space. However, the stock comes with its own set of risks, and investors shouldn’t be blindly chasing its rally.
Instead, it may be wise to wait on the sidelines for GRUB stock to pull back on bad news or a larger market event before jumping in with both feet.
As of this writing Laura Hoy was long NFLX, AMZN and FB.
