Morningstar | Grubhub’s 2019 Forecast Hard to Chew; Lowering FVE to $80; Shares Remain Fairly Valued
Grubhub reported decent fourth-quarter top-line growth and a dip on the bottom-line, both roughly in line with our expectations, as we had braced ourselves for the significant advertising and new market investments. But, Grubhub’s 2019 guidance was a bit difficult to swallow. Marketing and new launch spending will lead to significant incremental expenses, hitting margins considerably after we adjust for management’s guidance. Considering this and what we believe are the more permanent challenges it represents, we are lowering our fair value estimate for this no-moat company by around 4% to $80 from $83.Driven considerably by organic growth, Grubhub’s fourth-quarter revenue grew by 40% year over year to $288 million, bringing total revenue for the year to $1 billion, a 47% year-over-year increase. Excluding LevelUp and Tapingo, Grubhub’s key operating metrics increased, but at a slower rate. Active diners rose 22% year over year to 17.7 million, following a four-quarter run of year-over-year growth above 65%. Daily orders increased to 467,000, up 19% from last year. Altogether, these lead to 21% increase in food sales per order, totaling $1.4 billion. We think such overall decelerated growth will continue for these key metrics – but cross-selling opportunities from LevelUp could kick in sooner than expected, helping to buffer active diner deceleration.
In the quarter, margins took a hit (as expected) largely due to increased advertising spending, specifically via TV and launching in new delivery markets. Full-year adjusted EPS came in at $1.66, in line with our projection.
First-quarter and annual guidance was disappointing. While we slightly boosted our 2019 top-line estimates, margins are expected to take a drastic drop. For the year, Grubhub plans to add $10 million each quarter in additional delivery investment and $10 million-$20 million to additional advertising investment. This leads to a net income estimate at the lowest point it has been since 2015. Fortunately, the marketing increase does appear to be constrained to 2019, though we still think it could go in vain as loyalty in food ordering services is getting more and more difficult to gain.
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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