Morningstar | Grubhub Changes Order on 2018 Outlook; Raising FVE to $83 From $81; Shares Now Fairly Valued
While Grubhub reported decent third-quarter results despite the seasonally poor quarter, fourth-quarter outlook is mixed as the company prepares to take advantage of a number of rollouts to occur in the fourth quarter. In the third quarter, active diners saw healthy growth and there was less decline in orders than expected. Improving order volume should benefit fourth-quarter revenue likely to be driven by significant marketing investments. After adjusting for outlook revisions for improved fourth-quarter revenue and an EBITDA decline, we are raising our fair value estimate to $83 from $81 for this no-moat company. We note that while Grubhub shares had declined 24% since the end of August, they remained overvalued, in our view. The stock is down around 12% in reaction to third-quarter results and is approaching 3-star territory.Grubhub’s total revenue grew by 52% year over year to $247.2 million, driven by order volume. Total daily orders fell less than projected, down 1.7% sequentially at 416,000 daily orders (rather than its forecast mid- to high-single-digits). Food sales per order remained roughly flat and active diners rose 5.1% sequentially to 16,379.
Operating margin came in at 8.8%, which marked a significant fall year over year (from 10.7%) and sequentially (from 14.3%). Technology costs were partially responsible for the decline, increasing by 49% year over year, in response to new delivery markets’ investment needs.
Looking ahead, the fourth quarter is expected to see the good with the bad. Management increased the revenue outlook range by roughly $20 million to $283 million-$293 million due to LevelUp’s impact and a reforecasting of order volume. Partially offsetting the more optimistic outlook, management guided for a significant decrease in EBITDA for the fourth quarter due to a $10 to $20 million increase in marketing. Grubhub claims that the marketing will help it take advantage of the momentum gained from thousands more Taco Bell and KFC locations to be added. We think this spending is a necessary evil, as Grubhub is quickly losing share to Uber Eats and will also need to see competitive results from the 100 new markets Grubhub plans to enter in the fourth quarter. We believe such hefty investment will need to be somewhat sustained in this competitive environment, taking a large bite from profits over time. This supports our no-moat rating for Grubhub.
Grubhub and its wholly-owned subsidiaries provide an online and mobile platform for restaurant pick-up and delivery orders. The company connects diners and restaurants through restaurant technology and platforms. Diners enter their delivery address or use geo-location within the mobile applications and the company displays the menus and other relevant information for restaurants in its network. Orders may be placed directly online, via mobile applications or over the phone. The company primarily charges the restaurant a per order commission that is fee based. In several markets, the company also provides delivery services to restaurants on its platform that do not have their own delivery operations.
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