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Summary

  • Full integration of Seamless and GrubHub merger creating strong market leader.
  • Huge opportunity in highly fragmented market with current base of 600 U.S. cities.
  • Potential for international expansion via acquisitions.

Later this week when GrubHub (NYSE:GRUB) hits the open market with an initial price offering (S-1), investors will likely pour into this growth company. Unfortunately, due to high demand and a small chunk of the overall company, shares will likely soar to unattainable levels. The result could see early shareholders get burned as the stock falls and IPO buyers cash out. Despite this likely scenario, I believe investors should try and get in on the IPO from their broker or wait for several weeks and buy into this growing story.

GrubHub is offering over 7 million shares in its IPO. Four million come from the company itself, with an additional three million coming from existing shareholders. After setting an initial pricing range of $20 to $22, the company has raised that level to the $23 to $25 range and is reportedly seeing strong demand.

GrubHub is the resulting company from a merger between Seamless and GrubHub in August of 2013 that created the leading online and mobile platform for ordering food. The company is "connecting hungry diners with local restaurants across the country." The company's targeted market is independent restaurants, which represent 61% of the United States market. By utilizing GrubHub, small restaurants gain an instant online and mobile presence with no upfront costs. In fact, one of the company's key market opportunities is listed as "large and fragmented market."

The company's key competitive advantages from the filing:

· Market leader

· Powerful two-sided network effect

· Growing and recurring diner base

· Product innovation

· Mobile engagement and monetization

· Attractive business model

GrubHub's growth strategy:

· Grow our two-sided network

· Enhance our platform

· Deliver excellent customer service

· Pursue strategic acquisitions

In 2013, GrubHub had 135,000 daily average Grubs, or what it considers members. The company was responsible for $1.3 billion in gross food sales during the 2013 year. As of December 31st, the company had 28,800 restaurants on its platform.

There is plenty of room for expansion for GrubHub, which is one of the biggest reason I believe investors should get in after the subsequent fall of the stock. The company has a presence in 600 U.S. cities and London. There is room for many new cities and the addition of restaurants within existing cities.

Another key area of growth for GrubHub is mobile utilization. Back in 2011, when both GrubHub and Seamless were beginning entry into mobile with dedicated applications, mobile sales represented only 20% of total sales. Now in 2013, that number has grown to 43%.

In 2013, GrubHub reported revenue of $137.1 million, an increase of 67%. Net income was $6.7 million for the full year. These numbers were powered by growth in cities, restaurants, and customers, with the combination of the two companies integrated together. Here is a look at recent financials and key figures:

2011

2012

2013

Revenue

$60.6 million

$82.3 million

$137.1 million

EBITDA

$14.8 million

$17.2 million

$38.1 million

Net Income

$15.2 million

$7.9 million

$6.7 million

Number of Diners

689,000

986,000

3.4 million

Daily Average Grubs

45,700

62,000

107,900

Gross Food Sales

$412.2 million

$568.8 million

$1.01 billion

Revenue continues to climb and in 2013, the company saw quarterly increases. Here is a look at all four quarters from 2013.

Revenue

Net Income

First Quarter

$25.8 million

$1.26 million

Second Quarter

$26.9 million

$1.82 million

Third Quarter

$35.5 million

$2.05 million

Fourth Quarter

$49.0 million

$1.61 million

After the IPO, GrubHub will have over 78 million shares outstanding. With around 7 million shares being sold, less than 10% of the company's shares will be available on the open market. This will create strong demand with limited supply. I would not be surprised to see shares hit the $40 level on their first day of trading. This is the reason why I recommend getting in early on the IPO. With that being said, I believe investors will take profits and sell shares within the first week. I would be a buyer at around the $25 to $30 range for the long-term opportunity both in the United States and international markets, likely via acquisitions.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GRUB over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: GrubHub IPO Will Reward Long-Term Investors