Food-delivery giant GrubHub (NYSE:GRUB) reported stellar second-quarter numbers this morning, and GRUB stock is up more than 20% to fresh all-time highs as a result.
My takeaway from the report and post-earnings pop? The numbers were great. The story is only getting better. Long-term, GRUB stock can and will head above $200.
But, valuation is a concern in the near-term. The price tag has temporarily sprinted ahead of fundamentals, and I wouldn’t be surprised to see choppy trade follow this big pop.
Longer-term, though, GRUB stock will trend higher.
Here’s a deeper look.
GrubHub’s Quarter Was Amazing
GrubHub’s quarter was nothing short of spectacular. Across the board, growth remains robust and simply refuses to slow down.
Revenues rose 51% year-over-year, versus 49% last quarter and a run-rate of 30-40% for the past several years. Active Diners rose 70%, versus 72% last quarter and a run-rate of 20-70% over the past several years. Daily Average Grubs rose 35%, the same mark as last quarter and up from a multi-year run-rate of around 20%. Gross food sales popped 39%, also the same mark as last quarter and also up from a multi-year run-rate of below 30%.
Meanwhile, adjusted EBITDA margins are stabilizing and showing signs of long-term improvement, and the full-year 2018 revenue guide was hiked from 39% growth to 43% growth.
Overall, the quarter was very, very good, as illustrated by the big rally in GRUB stock.
Long-Term Growth Drivers Are Strong
Strong second quarter numbers from GrubHub underscored that the company’s long-term growth drivers not only remain in-tact, but are actually strengthening.
Everything is going online. This started with shopping, but now includes entertainment and food ordering. GrubHub is a key player in the online transition in the food ordering world, and as such, is powered by the long-term growth narrative of digital food ordering become more and more commonplace.
Competition risks have been the big concern for GRUB stock. But, the company has brushed away such concerns with continued robust revenue and profit growth. As such, either GrubHub is killing the competition, or this space is big enough to accommodate multiple players, neither of which presents a material risk to GRUB stock.
Long-term, then, so long as the digital food ordering space keeps growing, GRUB stock will keep rising.
GrubHub Stock has $200-Plus Potential
Long-term, I think GRUB stock heads towards $230.
Global restaurant spend is estimated between $2 trillion and $3 trillion. About $800 billion of that is from the U.S. The other roughly $1.7 trillion is international.
In the the $800 billion U.S. market, online delivery penetration remains rather anemic. Morgan Stanley estimates that the U.S. online delivery market was roughly $16 billion in size in 2017. Roughly half of that $16 billion was from direct restaurant deliveries (think delivery chains like pizza shops). The other half ($8.3 billion) was from delivery platforms.
GRUB’s gross food sales totaled $3.8 billion last year, implying 45% market share.
Over time, the online delivery market will grow in size due to higher penetration, and GRUB’s market share will drop due to increasing competition. Assuming online delivery penetration grows to 10% (on par with current e-retail penetration rates), then you are looking at an $80 billion online delivery market long-term. Maybe a quarter of that is from direct deliveries, leaving $60 billion for online delivery platforms. Assuming GRUB’s market share drops to 25%, then GRUB’s gross food sales should trend towards $15 billion in the long-run.
On the international side, penetration and market share rates will be way lower because GRUB has zero presence internationally, while competitors like Uber have a significant international presence in ride-sharing. Thus, from the $1.7 trillion international restaurant spend pie, I think that 5% will be dedicated to delivery and 75% of that will be dedicated to delivery platforms. Of the remaining near $64 billion, I think GRUB can take home about 5%, or just under $3.2 billion.
Overall, gross food sales should total $18.2 billion in the long run. Assuming a 25% take rate, GRUB’s total revenues at that time will be roughly $4.55 billion. Adjusted EBITDA margins should scale towards 40% thanks to opex leverage, and that should flow through into earnings of roughly $11.70 per share.
A growth-average 20x multiple on that implies a long-term price target of over $230.
Near-Term Valuation Is A Concern
Right now, the market is pricing in for GRUB stock to get $230 in 5-6 years, assuming a 10% discount rate.
I don’t think that will happen. In order for GrubHub to report $11.70 in earnings per share in 5-6 years, that would imply ~45% to ~60% earnings growth per year over the next 5-6 years. That is possible. Profit growth was nearly 100% last quarter. But, growth will inevitably slow, and projecting out a 50% earnings growth rate over the next 5 years feels aggressive.
As such, I think GRUB stock is due for some near-term turbulence. Near-term valuation is a concern. But, longer term, GRUB stock is a winner that should be able to head towards $200 and higher. I think such prices are reasonable in a 7-10 year window.
Bottom Line on GRUB Stock
GRUB stock is a long-term winner. Doubters who have slammed on the table about competition and valuation have been wrong so far, and will be wrong in the long-term.
That being said, stocks don’t head upwards in a linear fashion, and GRUB stock does seem fundamentally overstretched here and now. Consequently, I think a pullback is necessary and healthy.
But, if you are in this stock for the long run, there is no reason to sell. I maintain that this is an “unstoppable stock” in the long-term.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
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