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Morningstar | Grubhub Caters to Restaurants’ Branding Needs as It Reports Strong 1Q Results; Maintaining $80 FVE

Grubhub reported first-quarter results slightly above our expectations as the company saw traction from its Taco Bell partnership, which helped to drive significant diner growth. Additionally, growing partnerships with restaurants to build out native apps outside of Grubhub’s app (using LevelUp’s technology) helped results in the healthy quarter. We think these drivers show a healthy appetite for Grubhub’s offerings, but one that can easily be reproduced by competitors. We are therefore maintaining our $80 fair value estimate for this no-moat company, as we continue to believe the company will experience decelerating revenue growth over the next 10 years, coupled with significant marketing expenses to survive fierce competition. While the stock is up 6% in after-hours trading, it remains 3-star rated, and we recommend waiting for a wider margin of safety before investing in this name.

Grubhub’s first-quarter revenue grew by 39% year over year to $324 million. Active diners rose 28% year over year to 19.3 million, with hundreds of thousands of new diners estimated to stem from the Taco Bell launch. Grubhub noted that these active users have higher repeat rates than users added last year, although the magnitude of the repeat was not disclosed. Also in the quarter, daily orders increased to 521,000, up 19% from last year as profitability per order increased.

In April, Grubhub announced a new partnership with Just Salad in which Grubhub would leverage its POS capabilities via LevelUp and streamline Just Salad data from both its LevelUp app and Grubhub channel to one dashboard. We think Grubhub’s entrance into native app offerings is a wise choice. Edison Trends reported Grubhub’s on-demand food market share decreased from 38% to 27% from March 2018 to February 2019, which we believe to further support our thesis on the competitive market. We think Grubhub’s hosting of native restaurant apps will lead to less friction between restaurants as it helps to maintain restaurant branding. Plus, we like that this offering innately entails exclusivity, whereas for third-party takeout delivery, exclusivity with a company like Grubhub or UberEats is rare. However, other competitors have followed suit, with Uber acquiring orderTalk, a similar company to LevelUp, last year. Additionally, while Grubhub claims it is the only food delivery app sharing customer data with restaurants, we think this is easily replicable if it does prove to be a major selling point for restaurants. For these reasons, we continue to believe Grubhub lacks any moat sources currently.