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Bear of the Day: Grubhub (GRUB)

Kevin Cook
Bear of the Day: Avon Products (AVP)

In early February, right before their Q4 2018 report, I was long Grubhub (GRUB) shares near $80 because I saw relative value in a dominant player in food delivery services.

 

But a mixed quarter and outlook sent investors and analysts reeling. GRUB shares plunged 20% on the open February 7, but then rallied after the company conference call to close down only 2% in a wild session where over 27 million shares changed hands.

 

Here's how my colleague Tracey Ryniec described the report and call, which included a 30% EPS miss and management basically saying they didn't care about earnings as they continued to invest in the business infrastructure and thus drive up costs...

 

On Feb 7, Grubhub reported its fourth quarter results and missed on the Zacks Consensus by 9 cents. Earnings were $0.19 versus the consensus of $0.28.

 

Revenue soared 40% to $287.7 million, thanks to acquisitions of LevelUp and Tapingo during the year, as it grew active diners on its platform by 3.2 million during the quarter.

 

Active diners jumped to 17.7 million, up 22% from 14.5 million in the fourth quarter of 2017.

 

Gross food sales were $1.4 billion, up 21% from $1.1 billion in the fourth quarter of 2017.

 

Estimates Cut as Expenses Rise

 

The company has been rolling out new partnerships, like the one with Yum! Brands (YUM) Taco Bell.

 

But expenses have been on the rise.

 

As a result, the analysts have slashed earnings estimates across the board for both 2019 and 2020.

 

Earnings are expected to decline 10.3% in 2019 as 7 estimates were cut after the earnings report. That pushed the Zacks Consensus down to $1.49 from $1.74. Grubhub made $1.66 in 2018.

 

Similarly, 6 estimates were also cut in the last 7 days for 2020, pushing the Zacks Consensus down to $2.20 from $2.42.

 

Grubhub said on the conference call they weren't managing the business for earnings.

 

But the estimate cuts are the reason the stock is now a Zacks (Strong Sell).

 

Revenue is the opposite story. Grubhub gave guidance of a range of $1.315 to $1.415 billion. The Zacks Consensus for Revenue is at $1.37 billion, or a gain of 36% year-over-year.

 

(end of excerpt from Tracey Ryniec report on Feb 15)

 

Priced for Growth in a Flood of Competition

 

Tracey concluded her article talking about rising competition from Amazon (AMZN) and UberEats and how GRUB shares still weren't cheap. "Grubhub is definitely a growth stock, with a forward P/E of 54," she noted.

 

Since the Q4 report, GRUB EPS consensus for 2019 has fallen 27% from $1.98 to $1.45. But the stock still isn't a bargain trading at just under 50X.

 

And while this year's sales are expected to grow 36% to $1.37 billion, the growth outlook is not as attractive when you consider that the company's investment theme may have to dig in even deeper with new competitive threats like DoorDash and potentially Alphabet (GOOGL), whose ability to dominate a data-dependent delivery services business should be taken very seriously.

 

On Tuesday March 19, the case for the competition eating GRUB's lunch got a boost from KeyBanc analysts.

 

KeyBanc warned of declining GrubHub user trends, citing internal market data. Analyst Andy Hargreaves said "Diner retention, initial diner spend, and peak diner spend all appear to be deteriorating, which suggests lifetime value in newer cohorts is declining."

 

What stood out to me was Hargreaves view that increases in churn and new diner volume suggest GRUB would need to add 3X as many new diners in Q3 as in last year's quarter to maintain Active Diner stability. He also warned that DoorDash is "gaining significant share" in the market.

 

Since the KeyBanc report, GrubHub shares are down 11.5%.

 

Food delivery is definitely a business where economies of scale in digital information can make the difference in both advertising and user analytics. And GRUB is learning that new entrants may be able to easily build a cheaper and more efficient infrastructure.

 

Heck, Google may join the fray and do the whole business at break-even just to experiment with the potential rewards of ad revenues and data collection.

 

So it's best to stand aside in GRUB shares until the profit outlook turns around, because the shares will probably continue to get cheaper. The Zacks Rank will let you know.

 

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