GrubHub Inc. (GRUB) is the nation’s leading online and mobile food ordering company dedicated to connecting hungry diners with local takeout restaurants. The company’s online and mobile ordering platforms allow diners to order directly from approximately 35,000 takeout restaurants in more than 900 U.S. cities and London. Every order is supported by the company’s 24/7 customer service teams. GRUB has offices in Chicago, New York and London.
The Chicago-based company was launched by two young entrepreneurs in 2004 as a private entity and went public on April 4, 2014. GrubHub priced its shares at $26 ahead of the IPO, but the stock opened at $40 in its market debut, pushing the company’s market cap above $3 billion. So, GRUB started trading at a premium, up 53%.
GRUB has continued to realize explosive revenue growth, based on an ambitious, ahead of the curve business model that is relatively easy to understand. Before investing in such companies, I first must have absolute confidence in both the corporate governance and business model.
CORPORATE LEADERSHIP & BUSINESS MODEL
Before jumping ahead to corporate financials, please take the time to view this must see video of an interview with GrubHub co-founders Matt Maloney (CEO) and Mike Evans (COO), who both addressed and fully explained the following: (a) why they started their entrepreneurial venture; (b) the development and evolution of their business model; (c) the importance of mobile apps; (d) their commitment to train and rotate in-house project team members; and (e) their vigilance to recognize and deal with competitors.
On August 9, 2013, GrubHub and New York-based Seamless announced the merger (no buyout) of the two powerhouses in the online and mobile food ordering business.
On May 6, 2015, CEO Maloney commented on GrubHub’s aggressive growth plan.
KEY BUSINESS METRICS
To analyze the company’s business performance, determine financial forecasts and help develop long-term strategic plans, GRUB management reviews the following key business metrics:
2014(a) 2013(b) 2012 2011 Key Business Metrics: Active Diners (c) 5,029,000 3,421,000 986,000 689,000 Daily Average Grubs (d) 182,800 107,900 62,000 45,700 Gross Food Sales (e) $ 1,787.4M $ 1,014.9M $ 568.8M $ 412.2M
(a) Includes the results of GrubHub Inc. for the entire period.
(b) Includes results for the Seamless Platform through the Merger Date, and of GrubHub Inc., for the remainder of the period.
(c) Active Diners are the number of unique diner accounts from which an order has been placed in the past twelve months through the Company’s platform. Active Diners from the GrubHub Platform are included from the Merger Date.
(d) Daily Average Grubs are the number of revenue generating orders placed on the platform divided by the number of days for a given period.
(e) Gross Food Sales are the total value of food, beverages, taxes, prepaid gratuities, and any delivery fees processed through the Company’s platform. All revenue generating orders placed on the platform are included, but only the commissions from the transaction are recognized as revenues, which are a percentage of the total Gross Food Sales for such transaction.
The data in the above table show huge growth trends in all 3 business metrics and provide the basis and reasons for GRUB’s aggressive growth plan.
I first want to take a look at GRUB’s cash flow and determine if the company is creating value and making money. Although GRUB went public in April 2014, the company’s SEC filings provided some financials dating back to FY2011.
MARGINS Gross Operating Profit % % % 2011 67.64 16.48 25.10 2012 65.57 10.81 9.62 2013 63.90 10.86 4.92 2014 NA 17.72 9.56
ROIC 2013 2.38 2014 5.23 05/15/15 ROIC 6.49 WACC 2.18 EVA 4.31 ROE (ttm) 4.28 P/E (ttm) 110.86 FWD P/E 50.00 P/B (mrq) 4.12 P/S (ttm) 11.81 P/FCF 62.00 FCF/share 0.82 Cash (mrq) $ 298.22 Million Debt/Equity 0 Current ratio 2.57 Market Cap 3.35 Billion 52-wk high 47.95 5/15/15 Price 39.91 52-wk low 29.99
The tables above show that GRUB has relatively consistent margins (gross, operating and profit) that are acceptable for now, but have room for more improvement. On 5/15/2015, GRUB with a ROIC of 6.49% and a cost of capital (WACC) of 2.18% has created 4.31 cents of pure economic value for every dollar invested. One area of concern that needs further watching are the noticeable increases in stock-based compensation (perhaps related to the company going public in 2014) that put a serious drag on the company’s free cash flow (FCF).
Stock-Based Compensation FY 2012 $ 2.364 million FY 2013 4.933 million FY 2014 9.393 million
In a previous post here, I brought to attention a disturbing ongoing growing trend across corporate America that should alarm stock investors because companies are moving away from value creation to value extraction. More and more companies are allocating corporate profits to stock buybacks and paying dividends that diminish the amount for investments in productive capabilities and higher wages for employees. [Here’s some food for thought - an informative comprehensive article on this issue in the Harvard Business Review, Septermber 2014, Profits Without Prosperity by William Laxonick.
Next are the financial metrics that this board places a lot of emphasis.
REVENUE Change NET INCOME Change EPS Change (million $) **YoY** (million $) **Y0Y** diluted **YoY** FY 2011 60.611 15.211 0.36 2012 82.299 35.8% 7.919 -47.9% 0.19 -47.2% 2013 137.143 66.6% 6.747 -14.8% 0.12 -36.8% 2014 253.873 85.1% 24.263 259.6% 0.30 150.0% Q ending: 03/31/13 25.801 1.256 0.03 06/30/13 26.857 1.823 0.04 09/30/13 35.461 2.054 0.03 12/31/13 49.024 1.614 0.02 03/31/14 58.613 127.2% 4.353 246.6% 0.06 100.0% 06/30/14 60.006 123.4% 2.692 47.7% 0.03 -25.00% 09/30/14 61.941 74.7% 6.453 214.2% 0.08 166.7% 12/31/14 73.313 49.5% 10.765 567.0% 0.13 550.0% 03/31/15 88.249 50.6% 10.570 142.8% 0.12 100.0%
As shown above, GRUB is realizing huge revenue growth annually and quarterly. Looking at the recent Q1 ending 3/31/15, revenue growth YoY was up over 50%. Also, the net income growth YoY for the same quarter was up over 142%. With such spectacular results for 1Q 2015, one would think that the market would react favorably. Nope! The GRUB stock price dropped because the company missed expected earnings by 2 cents. To date, the company has reported non-GAAP data for only EBITDA.
Now let me address the current high 110.8 P/E. GRUB is a company with very high revenue growth coupled with a very high P/E. In a recent 3/30/2015 Forbes article, GRUB made the list of the 23 most expensive tech stocks with its back then very high revenue growth, P/S ratio 14x and P/E ratio 150x.
On the surface, the tech companies on our list share two traits in common: high valuation with high growth. The average year-over-year sales growth of these 23 companies is a stellar 58%. But half of them still record net losses despite such strong revenue growth, while most other companies have small net income.
Big names on this list included Facebook, LinkedIn, Twitter, Yelp, FireEye and Zillow. Among the 23 companies, GRUB had the 3rd highest and fastest average year-over-year sales growth, and, more importantly, despite having the 6th highest average P/E ratio, ranked 5th among the companies making money. Forbes warned that “stocks with lofty valuations tend to fall fastest and hardest during market corrections, so prudent investors will want to steer clear of bubble stocks and ETFs where these stocks are dominant.”
The good news is that GRUB’s P/E ratio continues to fall significantly because the company is operating in the black with zero long-term debt, creating value, making money and increasing earnings. As aforementioned, when GRUB went public just over a year ago, GRUB started trading at a premium up 53% (the company priced its shares at $26 ahead of the IPO, but the stock opened at $40 in its market debut, pushing the company’s market cap above $3 billion). Since then, historical data by quarters show the following significant downward trend:
P/E Quarters: Jun 2014 251.13 Sep 2014 179.27 Dec 2014 121.88 Mar 2015 126.79 5/15/2015 110.86 (a)
Note (a): the 110.86 P/E is based on $39.91 share price on 5/15/15 and $0.36 EPS for ttm ended in March 2015.
Furthermore, GRUB’s forward P/E of 50 indicates a continuance of this downward trend.
COMPETITION & FUTURE GROWTH
GRUB has successfully cultivated a loyal user base due to its easy-to-navigate user friendly interface. It also charges restaurants a lesser fee than its competitors for access to its platform and its broad base of users. However, low barriers of entry to the food order/delivery business attract startups that join the ongoing fray to secure recurring revenue from users. To stay ahead of the others, GRUB must keep growing its key business metric, the active diner headcount, and be vigilant of any erosion and decline on its platform, a signal that competitors are taking a chuck of its revenue.
There has been a lot of acquisition and consolidation activity in this arena:
• In June 2014, online travel booking powerhouse Priceline Group Inc. (PCLN) acquired OpenTable Inc. (OPEN) for $2.6 billion, a no-brainer deal at the time, as the opportunity to derive more revenue from each Priceline user was simply too attractive to pass up.
• On 8/4/14, online payment service Square branched out into new territory with a $90 million buy of Caviar, a high-end food delivery startup that tacks on a hefty service fee to bring consumers the finest in high-end dining. While Square’s big buy aims to address the proverbial “1%” of both diners and restaurants, other competitors are casting a wider net to reach the most users possible.
• On 2/10/15, YELP announced the $134 million acquisition of E24, a web and app based online food ordering service.
• On 3/2/15, GRUB completed the acquisition of California-based Restaurant on the Run, the West Coast’s largest restaurant food delivery service specializing in corporate catering and restaurant delivery at locations across Los Angeles, San Francisco, Orange County, San Diego, Houston, Seattle, Las Vegas and Tulsa.
Will GRUB become a buyout target? Potential suitors include the following:
• Two giants looking at this arena are Google and Amazon. At the Zillow talk session in 2012, GRUB CEO Maloney mentioned the possibility of partnering with Google. Google with its Place an Order option for now chooses to integrate and partner with (rather than displace entirely from the market) six in-place food on demand providers, including GRUB. Amazon, on the other hand, launched its own small pilot program, Takeout & Delivery, localized in the Seattle area.
• The Priceline Group Inc (PCLN) might also be interested in melding the operations of recently acquired OpenTable with GrubHub.
• Online travel site Expedia Inc (EXPE) or Expedia spinoff Tripadvisor Inc (TRIP) could reasonably eye GRUB stock in an effort to expand their e-commerce offerings and boost revenue.
Looking ahead, GRUB plans to approach chain restaurants and expand its presence in foreign urban marketplaces. They also are looking at other products like flowers for their order and delivery business model and platforms.
GRUB co-founder Mike Evans decided to leave the company after its public offering in April 2014. Evans lived out every founder’s dream. After a decade of hard work, he watched his company finally go public and got very rich in the process. Mike Evans gives a highly informative insider’s account of his experience through GrubHub’s IPO process from start to finish.
Although Evans left with his technical expertise developing all the algorithms for the business model, he trained the GRUB technical staff well to continue on without him. The corporate management appears strong and focused on achieving its very aggressive growth plan.
CONCLUSION & BOTTOM-LINE
I’ll close with my subject question: Any appetite for some GRUB? At this time, is it bon appetit or au revoir or adieu? A lot depends on one’s risk tolerance or one’s strict adherence to an investment discipline. GRUB enjoys a one of first out-of-the gate advantage along with a substantial scale presence in the U.S. urban marketplace over its competitors. Now it has taken its business model overseas to London and most likely beyond to other foreign markets. More importantly, GRUB is operating in the black with zero long-term debt, creating value, making money, increasing earnings and realizing explosive growth in revenues. It’s high P/E has dropped significantly over the past year. For now, this very aggressive, growth-oriented company appears on course, firing on all cylinders.
As always, conduct your own due diligence.
BTW, for those who want to check it out, here’s GRUB’s online food ordering site: