I like GrubHub Inc (NASDAQ:GRUB). I’ve used it several times. The user interface is smart, and drivers hit the delivery windows.
But, I’m not going there every day. No matter how fast a driver may be, the food is always going to taste a little stale. It’s not like eating at a restaurant. It’s a lazy night in.
As a result, the GrubHub bubble perplexes me and, make no mistake, it’s a bubble. The market cap is near $9.8 billion with trailing year revenue under $700 million. GRUB stock opened for trade June 1 at about $108 per share, but Canaccord Genuity analyst Maria Ripps just began coverage with a price target of $130.
Ripps says the company is getting more chains to use it, growing the delivery network, and becoming more attractive as a marketing channel. There’s a lot of room to grow in smaller markets, she thinks.
Fast Food, Fast Growth
Then there is the growth rate — revenue of $232 million for quarter ended in March, after $205 million in December, $163 million in September and $159 million in June. Half the revenue is reaching the gross profit line, although tax games meant the net income in March was less than $31 million, against $53 million in December.
An example of the synergy Ripps is talking up is GrubHub’s recent deal with Yum! Brands, Inc. (NYSE:YUM). Yum bought 3% of GrubHub and got a seat on the board, as well as access to GrubHub’s data on its KFC and Taco Bell orders.
GrubHub has been using equity infusions like this to take out smaller rivals, but there’s still plenty of competition from companies like UberEats, Postmates, and DoorDash, which recently signed a deal with Wingstop.
All the big fast food players, and many chain restaurants, now see delivery as their path to growth. Companies such as McDonalds Corporation (NYSE:MCD) are big enough to do this themselves, and grab the data GrubHub is now getting. Other competitors could make special deals for data, like the DoorDash-Wingstop tie-up.
But, that’s not my problem with all this.
How Often?
How often are you going to GrubHub? More to the point, are you going to switch from driving by a fast food emporium on your way home to spending the 20% up-charge to have your hamburger delivered? Every night? Really?
I know, there are lots of choices on GrubHub. You don’t have to eat fast food every night. The GrubHub boom has been accompanied by increases at other restaurant stocks, and same-store sales were up 1.5% for April. I get that a lot of offices may find GrubHub a good way to lunch at their desks.
But, we keep talking about how stretched millennial budgets are, how they’re all renting small apartments, putting off kids, and working their socks off. They apparently can’t afford to eat out very often, which is what buying GrubHub means. What about getting meal kits if they can’t cook? What about doing what young workers did in the 1990s and eating cereal for dinner? What about doing what I did when I was their age and making a sandwich?
The Bottom Line
I suspect that a lot of this GrubHub mania is a dream by fast-food merchants trying to grab a piece of this action from franchisees, and using the boomlet as a way to pump up their own stocks.
I don’t usually care about insider trades, as I know it’s practically salary, but general counsel Margo Drucker seems to be selling her stock as fast as she gets it. Maybe she knows what I suspect, which is that this boom can’t last. Millennial pockets aren’t that deep, and a bag of food delivered to your door is still just a bag of stale food.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
