The biggest losers during the late 2018 stock market sell-off were the market’s once loved hyper-growth darlings. In that group, one of the biggest decliners was online food ordering and delivery giant GrubHub (NASDAQ:GRUB). At its peak, GRUB stock traded hands at $150 in September 2018. By Christmas Eve, GRUB stock was below $70, meaning the stock had lost more than half of its value in just three months.
This steep drop is a buying opportunity.
The core rationale behind the late 2018 sell-off in GRUB was that compressing margins amid a slowing macroeconomic environment diluted the profit growth outlook. Specifically, competition in the online food ordering and delivery space has grown over the past several quarters.
As it has, GrubHub has upped marketing and growth-related spend to fend off that competition. It’s worked. GrubHub’s revenue growth has remained robust, but margins have taken a step back. That has raised some red flags for investors.
Ultimately, this concern is overstated and over-priced into GRUB stock.
The core of my bull thesis on GRUB is that the company has tremendous parallels with Amazon (NASDAQ:AMZN). That isn’t to say GrubHub will one day be an $800 billion company; that will never happen. Rather, GrubHub, much like Amazon, is a leader in a secular growth market powered by the at-home economy.
That positioning powered consistently large revenue growth at Amazon. That consistently large revenue growth was enough to offset margin headwinds. Ultimately, profits and AMZN stock have both risen by a ton over the past several years.
The same will happen with GrubHub stock over the next several years. As such, this margin-related dip in GRUB is a golden buying opportunity. Upside to $100 looks achievable within the next several months.
Margin, Competition and GRUB Stock
Over the past several months, GrubHub has lost half of its value due to concerns regarding rising competition and falling margins.
In a nutshell, GrubHub pioneered the online food ordering and delivery market. First mover’s advantage enabled GrubHub to become the market leader with 50%-plus market share in the U.S.
The market has since grown by leaps and bounds. This big growth has attracted multiple new entrants. Those new entrants have taken market share from GrubHub, and this once dominant online food ordering and delivery giant has consistently lost market share over the past several quarters.
This hasn’t affected revenue growth because the market is growing so quickly. Thus, market share erosion has been covered up by robust market expansion. Eventually, though, market expansion will slow. When it does, if GrubHub is still losing market share, then GrubHub’s growth trajectory could come crashing down.
Management knows this. As such, they are investing big in order to quickly expand into new markets and grow brand awareness. These initiatives will help fend off competition and stabilize market share. They are working, on both ends. Revenue growth has remained robust, and margins are falling.
The falling margins part is spooking investors because it’s eroding the long term profit growth outlook. As such, as margins have come down over the past several months, GrubHub stock has dropped, too.
Long Term Potential Is Enormous
The margin concerns which have stung GRUB stock over the past several months are small relative to the company’s long term opportunity.
From where I sit, GrubHub has significant parallels with Amazon. Both leveraged internet connectivity to disrupt traditional transaction processes and created marketplace platforms which catered to consumers immersed in the at-home economy.
The only difference is GrubHub did it in the global restaurant market, which is a $2 trillion and $3 trillion market, while Amazon did it for the entire retail market, which is nearing a $30 trillion market.
Amazon also controls over 50% of the U.S. ecommerce market, even amid rising competition. That isn’t the case for GrubHub. At best, this company probably walks away with 25% of the U.S. online food ordering and delivery market.
But, specifics aside, the overarching themes are consistent. Both companies are disrupting multi-trillion dollar industries using internet connectivity. They each are leaders in their markets, but they both also have a bunch of a competition. As such, they struggle with consistent margin expansion, but they also each report consistently robust revenue growth.
Over at Amazon, consistently robust revenue growth has more than offset inconsistent margin expansion. Net result? Huge profit growth, and huge gains for AMZN stock in the long run. The same will be true for GRUB stock.
$100 Is Reachable Soon
The math behind GrubHub hitting $100 within the next few months is simple.
According to Morgan Stanley numbers, gross food sales in the U.S. restaurant industry measured around $220 billion in 2017, and the digital delivery penetration rate was just 7%. Roughly half of those delivery sales were 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.
Online apparel sales represent well over 10% of total apparel sales and that rate is expected to march towards 20-30% over the next several year. Thus, during that stretch, it’s easy to see online food delivery sales marching towards a 25% digital penetration rate, too. Given inflation and population growth, it’s also easy to see U.S. addressable restaurant spend hitting $300 billion by 2025.
That combination implies ~$75 billion in online food delivery sales by 2025. Around 80% of that should be dedicated to delivery platforms, given the decreasing relevancy of direct delivery. That implies an addressable market in the U.S. of $60 billion. GrubHub should be able to take home about 25% of that market, implying gross food sales in the U.S. by 2025 of $15 billion.
On the international side, the market opportunity is larger. But, those markets are less developed and GrubHub’s market share will be much lower. Thus, it seems reasonable that GrubHub’s international business does only about $5 billion in gross food sales by 2025.
All together, GrubHub should be able to do about $20 billion in gross food sales by 2025. Assuming a 25% take rate, GRUB’s total revenues at that time will be roughly $5 billion. Adjusted EBITDA margins should normalize around 30%. That combination makes $10 in EPS seem achievable by 2025.
A restaurant average 20 forward multiple on $10 implies a 2024 price target for GRUB stock of $200. Discounted back by 10% per year, that equates to a fiscal 2018 price target of over $100. Thus, this stock has runway to over $100 within the next few months.
Bottom Line on GRUB Stock
GRUB stock is a long term winner going through some growing pains. Right now, the market is overreacting to those growing pains, and too much pessimism is priced into GRUB stock.
This won’t last forever. Eventually, robust revenue growth will override margin compression. When it does, GRUB stock will roar higher. Indeed, this stock has multi-bagger potential over the next several years.
As of this writing, Luke Lango was long GRUB and AMZN.