GrubHub has received a big upgrade today from analysts at RBC Capital Markets, but shares have yet to react to that upgrade. In fact, they were slipping as of this writing. In early trades they fell below the previous 52-week low of $30.62 per share, dipping as low as $30.55 per share.
Indeed, Wall Street seems to be increasingly bearish on GrubHub as short interest surged in the first half of June.
GrubHub rating to Outperform
In an interesting move, RBC Capital Markets analyst Rohit Kulkarni upgraded GrubHub from Market Perform to Outperform but trimmed his price target from $46 to $42 per share. The analyst lowered his target after adjusting his multiple on the company.
Kulkarni thinks GrubHub’s business model is “attractive” and notes that the company is the biggest online marketplace for food takeout and delivery. He added that GrubHub has a big addressable market. As a result, he sees the recent 30% decline in the food delivery company’s shares provides an attractive place for investors to buy into the stock.
Why has GrubHub pulled back so much?
According to Kulkarni, GrubHub’s recent guidance suggested that management intends to significantly increase spending in order to expand. He also said that there appear to be two big things investors are worried about at this time.
One is the concern that GrubHub might not be able to expand its margins next year. Kulkarni noted that the company plans to invest $10 million in expansion. When combining that spending with the recent acquisitions that have EBITDA margins in the low teens, he says Wall Street is expecting to see a slight year over year margin decline this year.
However, he thinks that the company could expand its margins if it can improve engagement among diners. Of course the result would be an incremental increase in orders compared to spending on delivery services.
GrubHub’s scale should help it stay ahead
The other problem that may have investors concerned is whether GrubHub can sustain its advantage over competitors in the market. Kulkarni noted that competition in the space is indeed on the rise, but he thinks GrubHub will continue to dominate because of its national scale. He also thinks that massive scale creates a barrier for restaurants in terms of switching to competing services even though it doesn’t cost much for them to switch.
Further, he pointed out that the company is entirely focused on its core food delivery services, which he thinks could lead to “deeper, non-trivial software integration” with its restaurant partners.
Short interest in GrubHub climbs
As GrubHub’s share price continues its freefall, short interest in the stock has climbed 24% month over month to 5.95 million shares. That means about 12% of the float is being sold short right now. The increase in short interest during the first two weeks of June came after a decline in short interest in the second half of May. There were about 4.78 million shares of GrubHub being sold short as of May 29, compared to the 5.19 million shares that were sold short as of May 15.
On Wednesday, according to Street Report, nearly 6.2 million shares of GrubHub changed hands compared to the average daily volume of about 1.8 million shares. After yesterday’s high-volume day, the new average daily trading volume was 2.05 million shares.
Just months ago, analysts were pretty positive on GrubHub, but they’ve been rather quiet on the stock of late, other than RBC Capital’s report today.
