GrubHub (GRUB, Financial), the country’s largest online food ordering marketplace, saw a sharp correction in its share price over the past month despite delivering a good quarterly result.
The company has excellent revenue growth, good margins, solid business fundamentals and a strong management led by CEO Matt Maloney, who is on an acquisition spree. The share price of GrubHub has been falling, and the apparent reason for the crash is the slightly weaker Ebitda guidance coupled with high valuation multiples.
When we analyze the three-year price chart along with the company’s revenues, we see both lines practically overlapping each other. The effect of the strong jump that the stock price experienced in January 2018, which continued for another seven months, was nullified by the recent correction. It is likely that the correction might continue, as the company is trading at significantly higher multiples than peers such as Yelp, which has equally strong margins.
Solid results but a possibility of declining margins
GrubHub reported its results about a month ago. The company demonstrated revenue of $247 million, beating analyst estimates and showing an increase of 52% as compared to the corresponding quarter of the previous year. Its active diner base grew by 67% to 16.4 million, and the average number of deliveries per day grew by 37% to about 416,000, which were strong positive signs. The company’s earnings per share of 45 cents were also above analyst expectations.
However, despite these factors, the company has indicated that there might be a decline in the Ebitda margins in their guidance. There is expected to be a higher spending towards sales and marketing, which would presumably be required as a result of the rising competition from Uber Eats, Yelp, Door Dash and other players. The management guidance for the top line continued to be solid, but the rising competition and the falling Ebitda could be a cause of concern for investors leading to the sell-off.
Key acquisitions
GrubHub recently went on to acquire Tapingo, a food ordering platform used across campuses of colleges and universities. The company paid $150 million in cash for the food ordering platform and expects strong synergies from the acquisition. The management also went on to 11 franchisee-owned OrderUp food delivery markets to add to their existing 27 markets. While these acquisitions are all important for the company’s growth, it is important to see how the management handles the post-merger integration processes and generates synergies.
Fundamentals are strong but valuation is high
The first point that one would notice when they see the financial summary of GrubHub on GuruFocus, is the solid 8/10 rating for Financial Strength and Profitability and Growth. The company is operating at a net margin of 14.83%, which is visibly superior to its peer group and is consistently creating value for its shareholders with return on equity of 11.14%. The growth numbers are also higher than its closest peer, Yelp, although GrubHub does have some amount of debt on its balance sheet, unlike its debt-free counterpart.
The problem with GrubHub arises in its valuation ratios. The company is currently trading at 57.94 times its earnings with an EV-revenue ratio as high as 8.57. These numbers appear to be very large when we compare them to Yelp’s valuation multiples. Its competitor is trading at a price-earnings multiple of hardly 16.73 with an EV-revenue ratio of 1.96. It must be noted that Yelp’s operations are also focused on services apart from food and restaurant delivery, but it is probably the closest listed peer to GrubHub.
Conclusion
Growth investors within the technology space would probably consider Grubhub among their list of favorites, especially given its performance over the last three years. Despite the recent plunge, the stock is still up by more than 20% from its price in January 2018, and its revenue is expected to grow rapidly.
Yet, this growth is expected to taper with time, as the competition in the industry is increasing with players like Uber Eats trying to acquire a large portion of the market pie. Given this fact, the valuation multiples at which GrubHub is trading are high, and it is possible that the stock might witness a further correction in the near future. Investors should remain cautious while holding onto the stock and keep track of news surrounding the company’s expansion initiatives and the evolution of its margins.
Disclosure: No positions
