Market Mad House

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Grocery Wars

What is the Value of GrubHub (GRUB)?

Assessing the value of any platform is tough, but determining the value of GrubHub (GRUB) can be far harder.

To explain GrubHub Inc. (NYSE: GRUB) is several things including an app, an idea, a platform, a network of restaurants, and a pool of drivers. The idea behind GrubHub is simple; an app that offers one place to order takeout meals quickly from a wide variety of eateries.

However, the reality at GrubHub is complex because the company offered meals from 95,000 restaurants in 1,700 cities in July 2018, ExpandedRamblings estimates. To add to the complex, GrubHub reported servicing 16.4 million active diners in January 2019.

Impressively, GrubHub estimates its drivers were delivering 416,000 meals each day in January 2019. Hence, GrubHub has built an incredible meal delivery platform.

How much is GrubHub (GRUB) worth?

GrubHub should make money from all those meals because it charges $4 to $8 delivery fee for each order. In addition, there is a $9.99 delivery fee for every GrubHub at Work order.

In fact, GrubHub records a gross profit of $135.71 million on revenues of $247.23 million for 3rd Quarter 2018. Notably, GrubHub achieved a gross margin of 54.89% in 3rd Quarter 2018.

Thus GrubHub is seemingly a lucrative business despite an operating income of $21.85 million and a net income $22.75 million for 3rd Quarter 2018. Moreover, GrubHub reports a free cash flow of $28.4 million and an operating cash flow of $49.45 million for 3rd Quarter.

In fact, GrubHub made most of its cash, $167.75 million, from financing in 3rd Quarter 2018. In addition, GrubHub had money in the bank the form of $294.55 million in cash and equivalents and $16.69 million in short-term investments on 30 September 2018.

The Value of GrubHub

Therefore, GrubHub’s business model is lucrative and growing. Notably, GrubHub’s revenues grew at a rate of 51.63% during 3rd Quarter 2018.

These figures are impressive but they do not justify the $77.24 share price reported on 24 January 2018. However, the $7.344 billion market capitalization reported on the same day seems valid.

Thus, the market prices GrubHub the company fairly but not GrubHub the stock. In fact, I think GrubHub could be a value investment for another company. For example, buying GrubHub is a smart move for a food-service company like Sysco (NYSE: SYS) or a grocer like Kroger (NYSE: KR).

Sysco, in particular, provides infrastructure in the form of food and supplies to restaurants. GrubHub provides digital and delivery infrastructure to restaurants.

Is Kroger a Threat to GrubHub (GRUB)?

Kroger sells food including meal kits and is investing heavily in grocery delivery. In fact, Kroger plans to offer Instacart delivery from 1,600 of its stores and double the size of delivery, Super Market News reports. In addition, Kroger is building its own direct to customer e-commerce platform called Kroger Ship.

Notably, a Kroger-GrubHub or GrubHub Instacart hybrid could deliver both meals and groceries. For instance, a GrubHub driver could drop off both your pizza and your bag of groceries.

Obviously, Kroger is a direct threat to GrubHub because it could offer delivery of hot meals cooked in its supermarkets. In particular, Kroger could offer deep discounts on both meals and groceries to lure customers away from GrubHub.

Is Amazon a Threat to GrubHub (GRUB)?

Beyond Kroger there is Amazon (NASDAQ: AMZN) which owns both Whole Foods and Amazon Restaurants. Interestingly, the Whole Foods Markets are closer to restaurants than traditional supermarkets. For instance, most Whole Foods have kitchens and serve a wide variety of hot meals.

Obviously, Amazon could leverage this by having Amazon Restaurants deliver hot meals from Whole Foods to Prime members. Notably, Amazon is rolling out same day Prime grocery delivery in Los Angeles.

Amazon and Kroger threaten GrubHub because their resources are far greater. For instance, both companies have the advantage of cooking meals in their markets for delivery. Hence, both companies could sell hot meals at a deep discount.

Notably, Kroger operates 2,782 stores many of which have kitchen facilities. In addition, Whole Foods operates 479 stores many of which have kitchen facilities.

To survive, GrubHub will either have to develop closer relations with restaurant operators or prepare its own meals. The cost of building kitchens or giving special deals to restaurants could be too much for GrubHub.

Under these circumstances, GrubHub; which pays no dividend is an overpriced stock. Thus investors should avoid GrubHub (GRUB) under current conditions. Despite its impressive growth, GrubHub is in too risky a position to be a value investment right now.

Hence, GrubHub is a value investment as an acquisition target but not as stock. Therefore, I do not expect GrubHub to survive as an independent company.