If there was any company you would peg as a clear-cut winner in this novel coronavirus pandemic, it would be food-delivery specialist GrubHub (NYSE:GRUB). When most states eventually issued stay-at-home orders for non-essential workers, restaurants were stuck in a quandary. GRUB represented a lifeline for the suddenly beleaguered industry. Yet GrubHub stock has disappointed investors this year until recently.
Another hard-hit company, Uber (NYSE:UBER) saw an opportunity and has offered to acquire GRUB. The two organizations are currently in discussions and insiders suggest that they could reach an agreement as early as this month. Interestingly, last week, the Los Angeles Times noted that:
“… Uber brought a $900-million bond sale. That’s up from a planned $750-million sale, which the company said may be used for acquisitions, among other general corporate purposes. The five-year notes, which can’t be bought back for two years, will yield 7.5%, said people with knowledge of the matter, who asked not to be named discussing a private transaction.”
In some ways, the move makes sense for both service providers. On one hand, the coronavirus and its impact to the travel industry has gutted the ride-sharing economy. Therefore, the one viable business is food deliveries. For GrubHub, it really missed an opportunity to gain market share, as its most recent earnings report demonstrated. However, this doesn’t mean GrubHub stock is an easy buy.
Federal regulators still have to approve the deal. While they may be willing to entertain the idea, I think it will be a hard sell given the unprecedented circumstances. Since we’re becoming more dependent on food deliveries, a loss of competition wouldn’t look good, sending GrubHub stock back to square one.
The New Normal Isn’t Necessarily Favorable to GrubHub Stock
If the deal falls through, I would be skeptical about GRUB as an investment. After all, GrubHub stock didn’t look interesting until headlines revealed the potential merger with Uber. Without that, the underlying company hasn’t captured the market share it ought to.
Although some companies can bounce back from strategic or tactical missteps, prospective buyers should carefully examine the course of GRUB over the next few months. That’s because the disappointing performance in shares may not be all attributable to management but rather, an unfortunate shift in consumer sentiment.
As you know, the pandemic has led to misguided thought processes. Some of them are harmless and rather humorous, such as consumers being fearful of drinking Constellation Brands’ (NYSE:STZ) Corona beer. Others, such as avoiding Chinese food and discriminating against people of east Asian ethnicity, are not.
At the early stage of the crisis, Chinese and Asian restaurants absorbed the brunt of the damage. But as people became accustomed to the new normal of takeout and delivery, many of these eateries have failed to recover or even partially mitigate the downfall. According to a CNN report last month:
As of April 15, 59% of independent Chinese restaurants across America had completely stopped taking debit and credit card transactions, indicating they have ceased operations, according to Womply, a data subscription service.
This is particularly damaging to GrubHub stock because prior to the pandemic, Chinese food, whether consumed as takeout or dine-in, represented a very popular consumer category. By taking out a key driver, GRUB naturally loses business.
Exacerbating matters for all restaurants is that GrubHub’s fees are very high. Previously, this has caused conflicts between GRUB and its clients. But in this pressured environment, such tensions could boil over badly. One need look no further than the class action lawsuit filed in Colorado on Monday which accuses GRUB of false advertising practices predating the pandemic.
Great Idea But Flawed Execution
Ultimately with GrubHub stock, I go back to the original theme about disappointment. For most industries, the coronavirus has been the worst nightmare imaginable. But for a select few, it was a chance to benefit from a free, organic marketing blast.
That GrubHub failed to capitalize is an indication that management has a great concept — share price performance wasn’t overtly terrible — but flawed execution.
Yes, some factors were completely out of the company’s control. Again, the loss of a key food sector was painful and frankly, unfair. But you look at an organization like Domino’s Pizza (NYSE:DPZ), which has thrived during the quarantine, and you wonder about how costly not capturing market share will be.
However, investors don’t need to completely abandon GRUB. It very well could get its act together should the Uber deal not work out. But not executing when the delivery business model was at its most favorable creates a credibility problem.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
