GrubHub: It Will Only Get Worse

| About: GrubHub Inc. (GRUB)
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Amazon continues to add more restaurants to Prime Now.

As revenue growth slows, cost controls become more important.

At this valuation, the stock seems a bit overvalued.

On Tuesday, Amazon (NASDAQ:AMZN) announced another expansion to the restaurant delivery service included in its Prime Now service. While this news isn't that major for the online retail/service giant, it is extremely important for competitor GrubHub (NYSE:GRUB). With Amazon expanding its reach in the segment, shareholders in GrubHub need to be more and more worried.

Amazon has really built up its presence in this space during the past nine months, entering the following markets as detailed below from its press release page. Cities in bold/underlined are those that GrubHub detailed as its major markets in its 2015 10-K filing.

  • September 2015: Seattle
  • October 2015: Portland
  • November 2015: Los Angeles
  • December 2015: Baltimore, Austin
  • January 2016: Chicago
  • February 2016: San Diego
  • April 2016: San Francisco
  • May 2016: Dallas, Manhattan (borough of NYC)

Amazon had already entered three of GrubHub's seven major markets before Tuesday's news, and Dallas and Manhattan certainly add two more major metro areas to the list. Given how Amazon continues to spend billions a year to make its Prime service attractive to consumers, I expect at least 3-5 more major markets to be entered this year, and perhaps some mid-major ones as well.

Amazon's expanding presences makes me a bit worried about GrubHub, especially as non-GAAP EPS are forecast to rise at a rate less than half that of revenues this year. More competition doesn't just take away revenue possibilities for GrubHub, but also will increase the amount of marketing expenses the company needs to battle Amazon.

Even with shares down about 6% on Tuesday, GrubHub still trades for about 31 times its non-GAAP projected EPS for this year. That's a somewhat rich valuation in my opinion for a name whose EPS are only forecast to rise by about 13%. With revenue growth expected to slow this year and next, the company will need to be very cost control conscious to get the bottom line moving. That can be very difficult if you are battling Amazon.

GrubHub's shares are taking a hit on Tuesday as Amazon has entered two more markets with its Prime Now restaurant delivery service. With Amazon launching in almost a dozen markets since last September, including a number of GrubHub's top cities, shareholders should be a bit worried. As revenue growth slows, can the company get its bottom line growing at a fast clip? That remains to be seen, and at a more than 30 times non-GAAP EPS valuation, it seems like a very risky proposition.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

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