One of the few beneficiaries of the novel coronavirus pandemic are delivery services. You’d expect firms like Grubhub (NYSE:GRUB) to be reporting an explosion in new orders now that restaurants are closed and people are stuck inside. But Grubhub stock fell 12% on Thursday after the firm’s first quarter results disappointed investors on Wednesday evening.
Grubhub was able to grow its revenue by $39.2 million, but diner data disappointed as the firm seemed to miss out on the rising wave of delivery requests seen by its peers.
The firm’s inability to appeal to customers in this kind of environment speaks volumes about the future success of the company.
What’s Wrong with Grubhub Stock
Despite the firm’s ability to beat earnings and revenue estimates, user metrics were entirely disappointing. Over the course of the first quarter, active diner growth declined to 24% from 28% in Q4. Daily orders were down 1% annually.
Perhaps some of that can be attributed to restaurant closures and coronavirus worries. After all, many restaurants closed their doors completely to protect employees from the spread of Covid-19. Even still, it’s worrying that at a time when people are stuck indoors for weeks, Grubhub hasn’t seen an uptick in its business.
What’s more, Grubhub didn’t provide guidance for the second quarter, except to say the firm was planning to spend almost all of its profits in order to grow its customer base. Investors may be able to get on board with aggressive spending, but only if the firm is able to prove that what it’s doing is working. So far, they’re not convinced.
Perhaps one reason for the firm’s lack of customers is the ultra-high fees it charges many restaurants that use its service. Some cities have cracked down on Grubhub by limiting the amount it’s allowed to charge restaurants, but others haven’t, allowing GRUB to significantly eat into restaurant margins.
That could cause many restaurants, especially those that are already on the brink of failure, to sort out their own delivery service. It could also cause some to opt for a takeaway service rather than paying for Grubhub to be an intermediary. In some cases, restaurants are actually asking customers not to use Grubhub and other similar services because of the exorbitant fees they charge.
Although Grubhub has pledged to help get its partner restaurants back on track, the company has done little in the way of fee reductions to make its service more useful.
That’s not what you want to see from an investment standpoint. The intermediary delivery service needs to benefit both the customer and the restaurant. Otherwise, it simply can’t work. If the costs to run Grubhub require high fees, it’s not a sustainable business.
Grubhub Is Broken
It’s unclear exactly why Grubhub can’t seem to pull itself together during the pandemic — this would be an ideal opportunity to lock-in new partners and acquire new customers. The drawdown in both orders and users is extremely concerning.
Earlier in April, investors started to get excited about Grubhub’s prospects during the pandemic. That’s because big names like Dunkin Brands (NASDAQ:DNKN) announced they’d be using the service to offer delivery to their customers. The stage was set for Grubhub stock to fly higher.
But there was little to no impact from the shift away from eating-in in the first quarter — a big disappointment for investors.
It’s worth noting that Grubhub stock, like most of its peers, has struggled with its own share of coronavirus-related issues that have kept a lid on profits. This week, Uber’s (NYSE:UBER) results will give investors an idea of how Uber Eats performed to give them a better idea of whether or not Grubhub missed the mark.
Now that restrictions are loosening, the current quarter will be make-or-break for GRUB stock.
Not only is the firm likely to see most of its restaurant partners reopen this quarter, but social distancing rules mean it will be harder for customers to dine in. Plus, many would-be diners may be hesitant to head back out in public, strengthening demand for delivery.
If Grubhub can’t produce an uptick in users as well as daily orders, that’s a signal that this business can’t last. The remainder of 2020 should be a boon for delivery services as social distancing restrictions are relaxed but not abandoned.
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.