Once a high-flying stock, GrubHub (NYSE:GRUB) has suffered in the last year. GRUB benefitted from its first-mover status as restaurants all over the country signed onto its food delivery service. However, increased competition has hurt profits. GrubHub stock lost about half of its value as profits fell despite impressive revenue increases.
GrubHub faces further pressure as DoorDash and UberEats parent Uber make plans to sell stock on the major exchanges. However, these competitor moves have ironically made GRUB a buy.
GrubHub’s Revolution
Since its 2014 IPO, GrubHub stock has been the only equity in the delivery space to trade on a public exchange. Now, with an upcoming IPO from both DoorDash and Uber, GRUB stock will face competition in the markets.
GrubHub prospered for years by democratizing food delivery. Before GRUB, pizza companies such as Domino’s (NYSE:DPZ) or Papa John’s (NASDAQ:PZZA) made up most of the food delivery business. Thanks to GrubHub, this expanded to the likes of McDonald’s (NYSE:MCD), Chipotle (NYSE:CMG), and every other restaurant imaginable, including family-owned establishments. Today, GrubHub serves more than 80,000 restaurants in over 1,600 cities across the U.S.
New Competition
Now, competitors have entered the market, and profits have fallen despite massive revenue increases. The $1.0 billion in revenue for 2018 represented a 47% increase from 2017 when the company brought in $683.1 million. Despite this increase, profits fell by 21%. Moreover, the company missed both earnings and revenue estimates in the fourth quarter.
Peers have also taken market share amid the falling profits. However, GrubHub maintains its lead position. GrubHub held a 43% market share in deliveries. This compares to 31% for DoorDash and 26% for UberEats.
Now, this battle moves to the stock market. With these peers launching IPOs, the competition now will likely have a more direct effect on GRUB stock. Of its peers, DoorDash may constitute a more significant threat. DoorDash has seen the largest market share increases. Moreover, the latest round of fundraising values DoorDash at $7.1 billion, the approximate market cap of GrubHub stock.
DoorDash IPO and GrubHub Stock
However, this may signify an opportunity in GRUB stock. Despite the market cap parity, GRUB offers more value with its larger market share. Moreover, GrubHub has managed to turn a profit since the beginning. Conversely, DoorDash CEO Tony Xu says the company will delay profitability to focus on growth.
Also, once the DoorDash IPO hype calms down, the profit factor favors GrubHub stock. After its stock starts to trade, DoorDash could turn to dilution and devalue its stock to fund its push for more market share. Investors will less likely face this concern in the profitable, more established GrubHub.
Furthermore, with industry expansion in high gear, all food delivery companies, including GRUB, will see high growth rates. Increased competition hurt GrubHub in 2018 and this year. However, in 2020, analysts expect double-digit earnings increases to return. Wall Street expects profits to rise by 57.4% in 2020. They also see average earnings increases of 24.7% per year over the next five years.
The price-to-earnings (PE) ratio now stands at about 92.2. Given this metric, one can understand why investors sold off GrubHub as profits have fallen. However, when looking at forward earnings, the multiple drops to around 35.3. This multiple appears reasonable when compared to GRUB’s predicted growth rates.
Final Thoughts on GrubHub Stock
The fear inspired by DoorDash gives investors a reason to bite into GRUB stock. Yes, both GrubHub and its stock have suffered as peers continue to take market share. Still, with massive revenue increases in the overall industry, GRUB should continue to benefit from its industry’s high growth rate.
In the March 4 trading session, GrubHub fell by about 7% on no news. I think the upcoming DoorDash IPO has driven this drop, and I see the decline as a buying opportunity.
I expect DoorDash will become GrubHub’s principal competitor and its only pure peer in the stock market. Still, DoorDash’s faster growth will come at a cost to the balance sheet, and perhaps DoorDash stock itself. With fewer risks and a high rate of profit increases, I see GrubHub stock as the safer and, longer-term, more profitable bet.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
