The current online speculation is that Amazon (NASDAQ: AMZN) might follow up its’ Whole Foods (NASDAQ: WFM) coup with an acquisition of GrubHub (NYSE: GRUB).
This would be a logical move because Amazon could use GrubHub’s network of drivers to deliver groceries and precooked meals from Whole Foods. GrubHub is an established brand with loyal followers; like Whole Foods.
Despite the possible synergy there is one major problem with GrubHub; it is seriously overvalued. Grub’s shares were trading at $46.33 on June 23, 2017. It also had a $3.994 billion market capitalization which is ridiculous because GrubHub is not making much money.
Why GrubHub is overvalued
The financial data provided by ycharts shows us why GrubHub is overvalued, and why Amazon might pass on this company. Some reasons why Grubhub is overpriced include:
- A net income of $57.34 million on March 31, 2017,
- A free cash flow of $39.38 million on March 31, 2017.
- Assets of $1.239 billion on March 31, 2017.
- $361.27 million in cash and short-term investments on March 31, 2017.
- $130.60 million in cash from operations on March 31, 2017.
- A diluted earnings per share figure of .66.
As you can see GrubHub is not making that much money from its’ business. Food delivery might not be as profitable as some people think. Another problem that GrubHub faces is intense competition from UberEATS.
GrubHub is Growing
There are some numbers at GrubHub that sort of justify the $3.633 billion valuation from June 23, 2017. These figures include a profit margin of 11.35%.
More importantly all of the key metrics at GrubHub are growing. For example revenues increased by $151.41 million for the last year available. GrubHub reported revenues of $385.82 million in March 2016 and $537.23 million in March 2017.
Consistent revenue growth is a long term trend at GrubHub since December 2013, its revenues have grown by $400.09 million. GrubHub started 2014 with $137.14 million in revenues.
The growth was not confined to revenues; GrubHub’s net income grew by $19.90 million during the year that ended on March 31, 2017. Grubhub reported $37.44 million in income at the end of first quarter 2016, and $57.34 million a year later.
Since 2013; GrubHub’s revenues have grown by $50.593 million, going from $6.747 million in December 2013 to $57.34 million in March 2017. GrubHub is also capable of steady net income growth which will appeal to value investors.
GrubHub has the Potential to become a Cash Rich Company
Finally there’s cash from operations; which is the most important number for a company like GrubHub in my opinion. That metric; which measures the cash running through the till, has exploded over the past year.
GrubHub’s cash from operations increased by $106.6 million between first quarter 2016 and first quarter 2017. GrubHub reported $33 million in cash from operations in March 2016 and $130.6 million just a year later.
This shows me that GrubHub has the potential to become a cash rich company fairly quickly. It managed to generate $16.07 million in cash from financing and accumulate $361.27 million in cash and short-term investments by the end of first quarter 2017.
The free cash flow is growing dramatically. GrubHub reported a free cash flow of $12.83 million in March 2016; that grew to $39.38 million a year later. That made for an increase of $26.55 million in 12 months.
Is GrubHub a Value Investment?
That demonstrates GrubHub has the potential to generate a lot of float. Float is a stream or store of cash that a company can quickly tap to finance acquisitions, expansions or improvements. Warren Buffett likes to describe insurance premiums as float.
Not surprisingly some out there will wonder if GrubHub is a value investment. After all it seems to have the potential to generate a lot of cash. The company is also in a less than glamourous business; delivering pizzas and Chinese food to the bachelors and soccer moms of America.
My take is that GrubHub is a potential value investment. It generates cash and seems to stay in its profitable niche of the online marketplace – unlike Uber. It will probably take GrubuHub a few years to achieve that status but it might become a real value stock at some point if Amazon does not buy it.
Why Amazon might buy Grubhub
GrubHub’s market is growing dramatically; 2015 was the first year on record that Americans spent more on restaurants and takeout than groceries, Quartz reported. Around 43.10% of household expenditures on food in the United States now go to restaurants and takeout. That provides a partial explanation for GrubHub’s revenue growth.
Another trend that can benefit GrubHub is the consumption of precooked meals from grocers, purchases of which have increased by 30% since 2008, NPD Group reported. Consumers spent $10 billion on 2.4 billion meals and entrees from grocery stores in 2015.
Since Whole Foods is a leader in this trend; Amazon’s use of WholeFoods and GrubHub would be pretty clear. The Everything Store would use GrubHub to deliver meals and entrees ordered from Whole Foods through Amazon’s Marketplace. A strong possibility is to use Alexa or a Whole Foods Button for Amazon Dash. If the hungry customer orders a box of Tide or some batteries at the same time so much the better.
Adding Whole Foods to Amazon’s ecosystem would make a lot of sense because the grocer’s entrees are popular. Like a lot of people I have grabbed lunch from “Whole Paycheck” many times but never actually shopped for groceries there.
Why Amazon might Not Buy GrubHub
Despite this synergy there are some reasons why Amazon might not buy GrubHub. The first is that the Unicorns; Deliv and InstaCart, might be a better deal. Deliv in particular might be a bargain; with some real retail experience, it is delivering Sam’s Club merchandise in Miami.
InstaCart has built a successful online grocery business. Amazon might buy Instacart simply to keep it out of Kroger’s hands. It was aggressive competition from Kroger (NYSE: KR) that drove Whole Foods’ to sell out to Amazon.
Another possibility is that Amazon might buy Uber; or Lyft, or Uber’s UberRUSH and UberEATS businesses. The Uber assets might become available if the ridesharing service collapses because of all the scandals.
Despite its potential investors should stay away from GrubHub right now. The stock is way overvalued despite its potential.