From a valuation perspective, GrubHub (NYSE:GRUB) is one of the cheapest growth stocks in the market. On an absolute basis, GRUB stock certainly isn’t cheap, at nearly 50x 2019 EPS estimates. But given torrid revenue growth and still-strong EBITDA margins, that multiple is reasonable. A valuation of ~5x 2019 revenue guidance looks downright cheap compared to other platform plays.
And GRUB certainly is much cheaper than it was, having dropped by more than 50% from September highs. If the company can keep growing, there’s an obvious path to solid upside here, particularly in a market where many similar plays have valuation worries.
At the moment, however, that seems like a big “if,” 2019 guidance given with Q4 results last month was notably disappointing. Costs are rising faster than revenue, leading to lower margins. And there’s an increasing amount of commentary suggesting that GrubHub is losing market share despite that spend.
If that share erosion continues, GRUB stock probably isn’t cheap enough – and maybe not close. But if GrubHub can even stabilize share, GrubHub stock can rebound sharply.
Disappointing 2019 Guidance
A number of high-multiple platform stocks stumbled in the fourth quarter, including GRUB, Square (NYSE:SQ), and Shopify (NYSE:SHOP). In a stronger market in 2019, SQ and SHOP have rallied; GRUB has not.
One key reason is that Q4 earnings disappointed, particularly in terms of 2019 guidance. The revenue outlook still looks reasonably strong, with GrubHub projecting 31-41% growth on the top line. But costs are soaring, leading to pressure on margins. EBITDA is guided to increase just 1-13% from 2018 levels. EBITDA margins are guided to just 18.3% – against a 26.9% figure back in 2017.
That in and of itself isn’t fatal to the bull case for GrubHub stock. The company is investing behind the business: sales and marketing spend nearly doubled between 2016 and 2018, for instance. But that spend should drive further revenue and profits.
Operations and support spend has risen even faster, climbing 165% over the past two years. Some of that spend, however, comes as GrubHub enters new markets – which create new costs before revenues kick in.
Still, there are worries that margins are going in the wrong direction, when the point of a platform business is that those margins expand as the business scales. GRUB management said on the Q4 conference call that the rate of spending increase would slow as the year went on, presumably allowing for a return to expense leverage in 2019. But the performance of GrubHub stock of late shows that investors remain somewhat skeptical.
Market Share and GRUB Stock
The concern at the moment is that GrubHub is making all these investments and yet still losing market share. Last week, Edison Trends reported that privately held DoorDash had passed GrubHub in market share. On Wednesday, analysts at KeyBanc Capital Markets raised more market share worries. GrubHub stock dropped 8.4% on that report.
The move on Wednesday shows that investors are taking these concerns seriously. And they should. GrubHub is spending now to build out its business – and yet market share is declining. Is GrubHub giving up margin simply to run in place – at best?
If that’s the case, that’s a problem for GRUB stock – even 50%+ off the highs. Competition isn’t going anywhere. DoorDash likely will go public at some point in the near future. Uber, operator of UberEats, will execute its IPO this year. Amazon.com (NASDAQ:AMZN) whose moves have tanked GRUB stock in the past still looms.
To be sure, GrubHub shouldn’t be written off just yet. The company recently added Yum! Brands (NYSE:YUM) concept Taco Bell as a customer, a nice get. New markets should provide growth in the second half of 2019 and beyond. It’s unlikely that growth is going to be come to a screeching halt and if it doesn’t, GRUB stock really isn’t as expensive as it looks.
Can GrubHub Stock Rally Again?
A 50x multiple to 2019 EPS estimates hardly looks cheap. But if GrubHub management is right, and spend will pull back in 2020, GRUB can get reasonably valued in a hurry. Right now, 2020 estimates are for $2.22 in EPS, suggesting 50%+ growth and a 32x multiple. Assuming growth returns that year and continues going forward, GRUB can back to $100+ in a hurry.
35x 2021 EPS estimates around $3 does the trick. And even with KeyBanc’s caution, the Street remains bullish: the average target price for GRUB stock remains over $100, suggesting 50%+ upside.
So there is a path for GrubHub stock to provide superior returns. That will require costs to come down as scheduled in 2020 – without an attendant loss in market share. Given the potential upside, betting on GrubHub to pull that off certainly seems intriguing, at least.
As of this writing, Vince Martin has no positions in any securities mentioned.
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