GrubHub (NYSE:GRUB) is one of those companies that are doing great, however just because they are doing great does not mean you should own the stock.
At question is not management, the company's products or services or even its growth. For me, besides the above, investors also have to consider the valuation of a stock when weighing risk. And in the case of GRUB, it does not pas my valuation test.
GrubHub started as a bubble on day one
GRUB's IPO price back in April of 2014 was $26, and on the first day of trading the stock traded as high as $40.60 a share. Over the next 12 months or so the stock traded as high as $47 a share, only to tumble to as low as $18 a share, losing over 62% of its value. YTD however the stock has rallied once more, and is trading at above its 2014 IPO price, close to $41 a share.
The question is, if GRUB is such a high-flying growth stock, why did it tank a year after its IPO? The answer is that when stock started trading it was already a massive bubble. Let me tell you why.
Irrespective of profitability and revenue growth, I have yet to see any stock being able to support its stock price when trading at 10-15 times revenue. There might be some biotech stocks out there that can do this, however seldom have I seen anything else outside of the biotech sector valued so rich for long. If you ask me, investors who bought GRUB post IPO were destined to lose money no matter what.
GRUB's revenue growth has been impressive, and I think it will continue, however this is already baked into the current stock price and then some. On an EPS basis, yes the company is profitable, however the stock is no bargain.
For this year analysts are predicting $0.84 in EPS, and for next year $1.1 in EPS. That gives the stock a P/E of 52 for the end of the current year, and 39 for the end of next year. A forward P/E of 52 is not a bargain folks.
The competition is homing in on GRUB's turf
Granted that GRUB is the leader in the sector and has seen great growth and the company is profitable, however the competition in the space is after GRUB's turf, and it's out for blood. At some point, chances are that the competition will make a big dent on GRUB's revenue growth and profitability.
Groupon's (NASDAQ:GRPN) Ordeup for example is expanding very fast all over the U.S. Granted GRPN delivers to a fraction of the cities GRUB delivers to, however most likely GRPN already delivers in the major upscale markets that GRUB also delivers, to where most of the revenue is.
UBER via Uber Eats is expanding exponentially worldwide. And then there are dozens of other apps and companies that no one ever heard of, homing in on the sector. Even Facebook (NASDAQ:FB) is getting in on the act.
So while the food deliver sector is still growing healthy, the question if GRUB should be in any portfolio, given how expensive the stock looks to me, and just how about everyone under the sun is also trying to do the same thing.
The way I see it, there are no barriers to entry in this sector. Anyone who can make an app and come to an understanding with local food merchants can do what GRUB and everyone else is doing. Eventually something has to give, and that will probably be fierce competition in the sector, at the expense of growth and profitability.
I also don't like the fact that total shares outstanding have increased about 10% over the last two years. Yes the company is growing, but at some point dilution will take its toll on the stock if it continues.
Currently GRUB has a forward 12 months P/E of about 52, and is currently trading at almost 9X trailing revenue. This is still a very expensive stock in my book. And that's the reason why very few investors have made any money with this stock, because it was always trading a bubble multiples.
While I do not recommend shorting the stock (unless you have a talent for short selling securities), I would also not recommend buying it either, unless we see a generous correction in the stock.
If the competition does not get to GRUB, and if the stock does not tumble -- with its valuation being so rich -- at best I expect it to underperform over the next several years, as it has ever since it started trading.
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.