GrubHub shares continued to struggle today after a downgrade from Barclays on Wednesday. The firm’s analysts are cautious on local internet firms in general, but they’ve become especially concerned about GrubHub in light of rising competition from startups. The bearish report runs counter to the excitement Wall Street felt last month when the food delivery service beat earnings estimates.

They’re also worried that execution on the company’s delivery initiatives could become a drag on its margins.

GrubHub to Equal Weight

In a note dated Aug. 26, analyst Christopher Merwin said he cut his target price for GrubHub from $42 to $32 per share and downgraded it from Overweight to Equal Weight. Previously, he had been banking on the company’s large scale compared to competitors in the startup phase. He thought the company would have the advantage in penetrating its total addressable market, which he estimates to be worth $70 billion.

However, he thinks startups are beginning to pose a threat to GrubHub, especially since the venture capital funding environment has become so favorable. He believes these startups and the venture capital market will make it difficult for the company to grow in non-core markets. He estimates that GrubHub has more than half of the online food delivery market in the U.S. currently.

GrubHub seeing a slowdown in core markets

Further, he thinks GrubHub’s growth in core markets like New York has begun to slow down due to increased saturation. New York is an especially important market for the company because New York City generates more than half of the company’s revenue. Merwin recently conducted a survey of New York consumers which suggested that GrubHub’s penetration is at 19%.

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He thinks saturation in that market explains why the company has seen a slowdown in daily average grubs there. The food delivery service reported a 25% growth rate in daily average grubs during the second quarter, compared to 34% growth in last year’s second quarter.

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He also believes GrubHub will see further deceleration in growth in core markets while also encountering barriers to growth in noncore markets due to competition. Most competitors are private companies, which he expects to invest heavily in gaining share in their respective markets. Here’s a look at some of the key competitors GrubHub should probably start worrying about right now. These eight startups have gotten into the online meal or recipe delivery market within the last three years:

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GrubHub’s margins may struggle

Another area in which GrubHub could start having troubles is margins, according to Merwin. He said in order for the company to see the same amount of profits on restaurant service deliveries as it does on traditional deliveries, it would have to chart a massive 27% take rate.

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However, smaller competitors could easily price their services much lower, putting GrubHub in danger of either losing market share or cutting its profits.

Shares of GrubHub closed up 0.69% at $26.10 per share today. The stock has been struggling over the last couple of months, hitting a new 52-week low in early July in spite of an upgrade from RBC Capital Markets analysts.

All graphs/ charts in this article are courtesy Barclays.

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