How Much Lower Can GrubHub Inc Shares Fall?

Shares of GrubHub (GRUB) have fallen more than 30% since the beginning of the year due to concerns about rising competition, high valuations, and missed earnings expectations. Recently, the web-based platform for restaurant pickups and deliveries traded below its IPO price of $26 from last April. As a result, some investors might be wondering if GrubHub is a worthy contrarian play.

Let's take a closer look at GrubHub's strengths and weaknesses to decide.

GrubHub's Android app. Source: GrubHub

The evolution of GrubHub
GrubHub was originally two companies -- GrubHub and Seamless. Back in 2011, GrubHub acquired Allmenus, a database of over 250,000 restaurant menus. Shortly afterwards, it launched an in-restaurant tablet-based system called OrderHub for streamlining orders. For customers, it released Track Your Grub, which provides diners with real-time notifications and maps of their orders. 

Seamless initially offered companies a web-based system for ordering food from restaurants and caterers. About a decade ago, the company launched a free ordering service to diners to complement its corporate-facing service. After being acquired and reprivatized, Seamless acquired Menupages, a restaurant database with user reviews and 50,000 menus.

GrubHub and Seamless merged in 2013 to become the company we know today, which lets diners order directly from roughly 35,000 restaurants in over 900 U.S. cities and London. The company now operates in four segments -- GrubHub, Seamless, MenuPages, and AllMenus.

GrubHub's slowdown
On the surface, GrubHub's numbers look solid. Last quarter, revenue rose 38% annually to $85.6 million as non-GAAP net income climbed 13% to $11.5 million, or $0.13 per share. Unfortunately, those numbers missed revenue expectations by $0.84 million and earnings estimates by a penny.

The problem is that GrubHub's growth is decelerating. The 38% sales growth last quarter represented a slowdown from 47% growth in the second quarter and 51% growth in the prior-year period. GrubHub's three core metrics -- active diners, daily average grubs (orders), and gross food sales -- also compared poorly to previous quarters:

Source: GrubHub quarterly reports

As GrubHub's core growth slows down, its investments in marketing and couriers keep climbing. That caused total operating expenses to rise 47% during the third quarter and outpace revenue growth.

Rising competition
Looking ahead, GrubHub might need to spend even more money to counter new food delivery competitors like Amazon, Yelp, and Uber. The three companies have dedicated user bases in e-commerce, business reviews, and ride-hailing, respectively, which could marginalize GrubHub's services.

In September, Amazon launched restaurant delivery options to Prime members in Seattle. The service lets Prime members view menus from participating restaurants and place orders from the app. Using the same tracking technology as Prime Now, customers can track their food deliveries in real time. Amazon says deliveries are usually made within an hour with no additional charges or delivery fees.

Yelp bought the Eat24 app earlier this year, which offers local delivery from over 20,000 local restaurants in 1,500 cities. Delivery fees range from free to $5, depending on the restaurant. Uber also recently launched UberEats, a similar delivery service in Los Angeles, New York, San Francisco, and Chicago. It offers several daily meals that cost around $10, with a flat rate delivery fee between $3 and $4.

Unattractive valuations
Those challenges caused GrubHub stock to slide, but its valuation still remains high. GrubHub trades at 56 times trailing earnings, compared to an industry average of 31.7 times for the internet information providers sector. GrubHub's price-to-sales ratio of 6.7 times is also higher than the industry average of 5.7.

Based on Thomson Reuters' long-term estimates, GrubHub has a 5-year PEG ratio of 1.7. Since a PEG ratio under 1 is considered "undervalued", we can't really say GrubHub stock is a bargain. These numbers all indicate that GrubHub stock might need to fall another 50% before anyone considers it a value play.

Don't write off GrubHub yet
I personally wouldn't touch GrubHub at current prices, but I'm not ruling out the possibility of a turnaround or buyout just yet. GrubHub has a first-mover's advantage in the space, and people might never get used to ordering via Amazon, Yelp, or Uber for restaurant deliveries. If that happens, I wouldn't be surprised to see GrubHub acquired by one of the major tech companies. But for now, I believe the risks outweigh those potential rewards.