Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Is GrubHub Making Money?

App-based delivery is booming these days and the food is leading the trend. Americans ordered 1.7 billion takeout meals over the past year, the NPD group calculated.

The market for munchie delivery is lucrative and growing fast. Morgan Stanley estimated that Americans ordered $6 billion worth of takeout in 2016, and projected that amount to grow to $16 billion by 2020. Even on the local level, meal delivery is huge; takeout meals account for 25% of the restaurant business in the Bay Area, The San Francisco Business Times estimated.

The delivery-market in the city by the Bay so good that a delivery only restaurant called Young Fava has opened there. Young Fava does all of its business through apps like UberEats and Amazon Restaurants rather than table service.

Naturally, all this will have investors wondering if the one publicly-traded food delivery app; GrubHub (NYSE: GRUB) is making money. The question is a fair one because some other app-based services like Uber are spectacularly unprofitable.

Can GrubHub Make Money?

The answer to the above question is possibly no because GrubHub reported very little income. The latest financial numbers indicate that GrubHub made $12.99 million in net income on September 30, 2017, despite revenues of $163.06 million on the same day.

GrubHub’s income is tiny, and it is falling. The net income was actually higher in June 2017, when it was $14.75 million. Part of the reason for that was Grubhub’s operating expenses were high; $145.64 million on 30 September 2017. The operating expenses are also growing dramatically; they were $136.70 million in June 2017 and $102.69 million in September 2016.

The operating expenses indicate that GrubHub might not be capable of making money. Instead, its’ expenses are eating up every cent the company makes. A reason why expenses are so high is that all those drivers want to get paid, so do the restaurants.

Another problem GrubHub has is that there might be no good way to stop its drivers’ from circumventing the payment app by simply taking cash. That explains why Grubhub only reported $17.42 million in earnings before tax on 30 September 2017.

How Much Cash does GrubHub have?

Theoretically, Grubhub’s business should be generating a lot of cash because the meals are supposed to be paid for with direct payments. The financial numbers do lend some credence to this hypothesis.

GrubHub reported an operating cash flow of $38.58 million on September 30, 2017. That was up from $16.17 million in June 2017, and $25.24 million in September 2016. Unfortunately, that operating cash flow is generating little float, GrubHub reported a free cash flow $7.57 million 30 September 2017, which was down from $13.04 million a year earlier.

Those numbers did translate into some value in the form of $331.61 million and short-term investments and total assets of $1.296 billion on September 30, 2017. That compared very favorably with $133.57 million in current liabilities. An even more satisfying figure was the complete lack of debt.

All this points to a potential value investment because GrubHub is capable of covering its operating expenses with the cash it takes in. That points to a solution; which would be a fantastic value investment if it can be implemented a large scale.

Is GrubHub Scalable?

The billion-dollar question at GrubHub can be defined as: is the app scalable? That means can GrubHub’s ecosystem be extended and implemented on a large scale.

Food-delivery is a lucrative business in affluent tech-savvy places like Brooklyn and San Francisco, but is it profitable in Canon City, Colorado, Christiansburg, Virginia, or Sudbury, Ontario? People in those places, already order pizzas, but will they also order Thai food, hamburgers, and steaks through apps.

A more important question might be, is will truck drivers, school teachers, prison guards, and factory workers be as likely to use GrubHub as investment bankers and software engineers? In other words, can be the working class be induced to start ordering through apps.

The GrubHub website is demonstrated for a photograph on an Apple Inc. iPhone in Washington, D.C., U.S., on Saturday, Feb. 4, 2017. GubHub Inc. is expected to release fourth-quarter earnings figures on February 8. Photographer: Andrew Harrer/Bloomberg

The available here is mixed, the working class has definitely embraced takeout pizza and Amazon (NASDAQ: AMZN) in a huge way. Yet, it remains skeptical of snazzier and more expensive solutions. An example of this is the failure of Uber to catch on in some communities.

This makes Amazon Restaurants the biggest threat to GrubHub because people are lazy and they are used to ordering stuff through Amazon. Amazon has the edge here because the public knows what it is, people outside of Oakland and New York are not aware of Grubhub’s existence yet.

Is GrubHub a good investment?

Despite its potential, GrubHub is a lousy investment. The stock was incredibly overvalued at $71.80 a share on 29 December 2017. There can be absolutely no justification for that valuation.

The only reason to buy GRUB is for its potential, which is vast. GrubHub’s ecosystem would be the perfect venue for delivery of a wide variety of goods and services. Just a few of the things that GrubHub drivers can bring to your door include; packages, letters, dry-cleaning, and groceries.

GrubHub is well-positioned to cash in on the inadequacies of the current delivery infrastructure. News reports indicate that UPS (NYSE: UPS) was so swamped during the 2017 Christmas rush that it was using golf carts to haul packages, and putting office staff to work as delivery drivers.

Apps like GrubHub might address this problem by providing a pool of drivers retailers can tap fast. Walmart (NYSE: WMT) and Kroger (NYSE: KR) are already experimenting with the use of Uber and Lyft for delivery. Problems abound including labor supply, union entanglements; many grocers including Kroger are union shops, worker relations, and costs.

If GrubHub can overcome some of the potential problems it might be in possession of a billion-dollar app. Until GrubHhub demonstrates that it is viable and profitable on a large scale investors should stay away from it. Unless of course, they want to order lunch or satisfy the late-night munchies.