Investors desperate to find something that works are picking up Grubhub (NYSE:GRUB) stock. Many figure that food delivery can succeed like nothing else during the outbreak of the coronavirus from China.
But will it?
Even with the latest gains, GRUB stock is selling for more than 30% less than it was worth a month earlier. Its market cap of $3 billion is almost three times last year’s sales, at a time when good retailers are still selling for a fraction of their revenue.
But that’s not the point, my friend.
The point is that with restaurants forced to close their dining rooms during the crisis, Grubhub delivery offers them a lifeline. Traffic in many cities was down by more than half over the weekend. Many are now being forced to go all take-out by local laws.
Grubhub insists it’s not profiteering and will waive some fees as well as set up a charitable fund for drivers. The fees can amount to one-third of the value of an order, eliminating any chance for a restaurant to profit. Grubhub’s hope is that after the emergency lifts, it will have better relationships, and a better business.
Grubhub is targeting its relief to small restaurants like Chicago’s Home of Chicken & Waffles, which is specifically mentioned in its release.
Grubhub in Trouble
Before the crisis, GRUB stock was facing trouble on every hand.
A month ago, New York City considered an ordinance to limit its fees, which they said were strangling small restaurants. The company was also facing lawsuits from small chains over the use of their logos on its site. Critics charged it was listing restaurants without their consent, pitching itself as a service to diners rather than cooks.
In response, Grubhub has tried to become creative on pricing. It created a subscription plan, $10/month for unlimited delivery from participating restaurants, and some cash back on the first month’s orders. The service, called Grubhub+, was just rolling out when the crisis became acute.
Analysts Are Unimpressed
Analysts had also been souring on GRUB stock. They noted the lack of a “moat,” with many restaurants playing it off against rivals like privately held Postmates, DoorDash and Uber’s (NASDAQ:UBER) Ubereats service.
The proof is in the numbers. Grubhub lost $18 million in 2019 on revenue of $1.3 billion, while serving an estimated 22.6 million diners and 300,000 restaurants. It had made money before, when competition was less intense.
Many restaurants are now being forced to close dining rooms entirely as the crisis peaks. Those in states that don’t allow alcohol delivery, like Georgia, are in special trouble. Some can partner with nearby wine shops on pick-up orders, but they still can’t use Grubhub for those customers.
The Bottom Line on GRUB Stock
I have been wrong on Grubhub, in both directions.
In 2018, I called it a bubble stock, at a time when its business was good. More recently, I suggested it might be bought by a larger company such as Uber or even Walmart (NYSE:WMT), after business turned sour.
The latest run-up sounds like a trade to me. As with some other speculations that have emerged during the crisis, such as Moderna (NASDAQ:MRNA) and Inovio (NASDAQ:INO), Grubhub is a stock you can play for a quick pop, then discard once trouble passes.
The problem is that I’m not a trader. Machines make short-term moves sudden and unpredictable. A lot of people have lost fortunes trying to maximize trading profits when trends reversed. So, speculate on Grubhub if you want, but speculator beware.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.