Valuation Is Starting to Become a Concern for GrubHub Inc Stock

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GRUB stock - Valuation Is Starting to Become a Concern for GrubHub Inc Stock

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Digital food ordering and delivery platform GrubHub Inc (NYSE:GRUB) has been one of Wall Street’s favorites for the past 2 years. Since early 2016, GRUB stock has risen by more than fivefold in value from $20 to over $100.

Why the big run-up? GrubHub finds itself at the heart of the at-home, on-demand economy, which has boomed in popularity recently. Over the past several years, technology has evolved to make consumers’ lives more convenient. During that time period, consumers have discovered that optimal convenience comes when they get to stay at home and do what they want, when they want.

Instead of going to the movies, consumers are staying home and watching movies. Look at how Netflix, Inc. (NASDAQ:NFLX) stock has exploded higher over the past several years.

Instead of going to the mall, consumers are staying home and shopping online. Look at how Amazon.com, Inc. (NASDAQ:AMZN) stock has exploded higher recently.

Instead of going to eat a restaurant, consumers are staying home and ordering food online. Look at how GRUB stock has exploded higher recently.

Broadly speaking, secular tailwinds will continue to drive excellent results for GrubHub. But the stock is already priced for that reality. Upside from here will be hard to come by considering the rich valuation.

As such, this is a name you want to own for the long-term, but not necessarily at this price. I’m waiting for a big dip, which could happen on any operational miscue.

GrubHub Is in the Same Boat As Netflix & Amazon

While it may seem silly to throw GRUB stock in the same basket as NFLX and AMZN, it actually makes a ton of sense.

NFLX stock is a pure play on the at-home, on-demand movie theater. AMZN stock is a pure play on the at-home, on-demand shopping mall. GRUB stock is a pure play on the at-home, on-demand restaurant.

Wall Street didn’t recognize that at first.

But then GrubHub started reporting big quarter after big quarter, with hardly any slowdown in headline growth numbers. That reminded investors of NFLX and AMZN — and Wall Street started to draw the parallels. That is why, over the past 2 years, GRUB stock is up 370% versus a 215% gain for NFLX and a 180% gain for AMZN.

But valuation matters. And after this big run up, GRUB stock looks fully valued.

GrubHub Stock Looks Fully Valued

This is a big growth company that isn’t showing any signs of slowing down.

Revenue growth has consistently hovered in the 36% to 43% range for the past several years. Revenue growth actually accelerated last year, from 36% the year prior to nearly 39%. Daily average Grubs growth has consistently hovered in the 21% to 24% range over the past several years, and also accelerated last year versus the prior year. Gross food sales growth has consistently hovered in the 26% to 32% range over the past several years.

These big growth rates aren’t going anywhere any time soon. Restaurant spend runs around $210 billion per year in the U.S. Roughly 5% of that is dedicated to the digital channel. That is an unusually low digital penetration rate. E-commerce sales represent roughly 10% of total retail sales in the U.S. and that share is growing steadily.

Assuming digital restaurant spend starts to look like the rest of retail, thanks to the mainstream emergence of platforms like GrubHub, then the digital food ordering market in the U.S. will grow to $21 billion relatively quickly.

GrubHub’s revenues last year were under $640 million.

Therefore, the runway for big growth to persist is quite long.

Growth will inevitably come down over the years thanks to elevated competition and tougher laps. This is best seen in the slight deceleration in Gross food sales growth over the past several years from 32% to 26%.

Therefore, revenue growth should look something like 30% per year over the next 5 years (versus 39% last year). Margins aren’t zooming higher, but revenue growth will drive some expense leveraging and give margins a nice boost over the next 5 years. That margin boost should turn 30% revenue growth into 35% earnings growth.

But GRUB stock trades 66 times forward earnings. A 66 forward multiple for 35% earnings growth is a massive, near-90% growth premium. The market is trading at a 12% growth premium. From this perspective, a 90% premium just seems like too much.

Bottom Line on GRUB Stock

This is a name you want to own in the long-term, because its a pure-play on some very strong secular trends playing out both in the U.S. and globally.

But the price at which you own GRUB stock matters. And today’s price is not the right price.

I wouldn’t chase the rally. But I would buy GRUB stock on any material weakness.

As of this writing, Luke Lango was long NFLX and AMZN. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/valuation-concern-grubhub-inc-grub-stock/.

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