GrubHub: Analysts Bullish On Restaurant Opportunities

GrubHub: Analysts Bullish On Restaurant Opportunities

GrubHub may be the best-positioned company in the restaurant delivery industry, which analysts believe is set to explode. But how will the company fare against rising competition? And is the industry really big enough to build a successful business on?

Analysts at Sterne Agee and Morgan Stanley think so.

GrubHub set to disrupt the delivery business

In a report dated April 17, Sterne Agee analysts Arvind Bhatia and Brett Strauser initiated coverage on GrubHub with a Buy rating and $56 per share price target. They say the company’s delivery platform is the dominant one in the industry.

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They estimate the restaurant takeout market in the U.S. at $70 billion and say that 95% of it is offline, meaning it is still very inefficient. As GrubHub is online-based, they believe it will significantly disrupt what’s a fragmented industry in desperate need of fixing.

The Sterne Agee team states that even though GrubHub is a leader in the industry, it only holds about 3% of the U.S. market, although they expect its market share to surpass 7% within the next five years. When looking at the online part of the market only, they say GrubHub holds more than half of the market, highlighting its leadership position and the opportunities it has to disrupt the market.

Significant growth expected from GrubHub

The analysts note that GrubHub is currently targeting independent U.S. restaurants. Estimates from Euromonitor indicate customers spent $221 billion at U.S. restaurants in 2013. Management at GrubHub estimate that approximately $70 billion of that amount was spent on takeout food. Additionally, the Sterne Agee team points out that just 5%, or about $3.5 billion of that total, was spent online. The other 95% was spent through traditional order methods like over the phone.

They expect GrubHub to enjoy a five-year compound annual growth rate of 26% for revenue and 30% for EBITDA. That would bring the company’s revenue to $821 million and its EBITDA to $298 million in 2019. Last year, GrubHub reported $245 million in revenue and $79 million in EBITDA.

Where will the growth come from?

The Sterne Agee team sees the main driver of growth for GrubHub as the shift from offline ordering to online ordering because of how much more convenient and efficient it is. They think the company will also improve its commission per order gradually as it attracts more restaurants and diners to its platform.

And finally, they say GrubHub’s auction- based pricing structure allows take rates to move higher and higher as more restaurants compete to get the visibility of being on the platform.

Why investors are concerned about GrubHub

The Sterne Agee team pointed out that one of the biggest concerns for investors regarding GrubHub is competition. Morgan Stanley analysts Dean Prissman, Brian Nowak and Jonathan Lanterman agreed in their recent research note, naming Eat24, Postmates, Munchery and Uber as being candidates to compete with GrubHub.

Like the Sterne Agee team, the Morgan Stanley analysts also see the food delivery market as being ripe for disruption as the shift to online ordering continues. They point out that GrubHub has enjoyed a sizeable amount of capital funding, while its tiny competitors have gotten very limited funding. This has enabled GrubHub to establish itself as the industry’s firm leader.

The Morgan Stanley team sees Yelp’s acquisition of Eat24 in February as being of little concern because it is only a tenth the size of GrubHub and only a “modest level of investment” seems to be planned for that acquisition.

The next battle line

They add that last mile delivery is the next focus within the industry, as marketplaces focusing on the final mile seem to be picking up steam. They say Doordash and Postmates were both able to raise a sizeable amount of capital as GrubHub launched its delivery service.

They think GrubHub is well-positioned in last mile delivery as well because it already has a demand base to use as a launch pad. They also say the company’s scale offers plenty of resources for investment and that “a limited pool of strategic buyers suggests GRUB is uniquely positioned to pursue acquisitions.”

They add that while Uber is often seen by investors as a potential disruptive force, they’re not that worried about it. They don’t completely discount Uber as a risk, but they say the company’s public disclosures make them think Uber management doesn’t feel any urgency to launch a competitor for GrubHub. Instead, they think Uber could become a logistics seller to online platforms like GrubHub and other food delivery marketplaces.

Morgan Stanley has an Overweight rating and $53 per share price target on GrubHub. As of this writing, shares were down 0.24% to $45.22 per share.


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