Stable demand, merger synergies to spice up GrubHub’s business

GrubHub, Inc. (NYSE: GRUB) has remained largely unaffected by market challenges, in an industry where most of its peers are struggling to gain a foothold. The company is on the path of a major transformation and looks to expand its market share in the food delivery space by combining with Amsterdam-based Just Eat Takeaway.com, under a merger deal signed earlier. Investors have been bullish about the deal as the combined entity — the largest player in the sector outside China — is expected to benefit from the COVID-driven demand growth.

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Read management/analysts’ comments on quarterly results

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The DoorDash Effect

GrubHub’s stock received a major boost this week, after the impressive post-IPO performance of rival food-delivery service DoorDash lifted investor sentiment. The ripple effect of that was felt in the performance of Uber Technologies (UBER) and Lyft, Inc. (LYFT) also. Meanwhile, there are concerns that a full-fledged market reopening – thanks to the encouraging reports from the vaccine front – would reverse a part of the growth online delivery services are currently witnessing. That will not bode well for the company and its peers.

Since the stock is unlikely to maintain the current momentum, it should be approached cautiously. From an investment perspective, however, keeping an eye on it will pay off.

Of late, there has been a mass shift to online services as customers continued to avoid visiting restaurants due to the movement restrictions. It is expected that more customers would order their meals online going forward, given the recent spike in COVID cases. The company, which has been aggressively reinvesting in the business, is better-positioned than others to take advantage of the opportunity.

From GrubHub’s Q3 2020 Earnings Transcript:

“Whatever we have on our platform right now is what we believe the current best practices and that’s justified by the exhaust of A/B testing. That will change over time. We will continue to optimize. We will continue to try to increase conversion for given cost constructs. And I believe that over time you will see all of our competition doing the same thing. But the reality is, it’s very hard to trick a consumer to pay more than they want to pay.”

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Though GrubHub’s third-quarter earnings declined about 40% from the year-ago period to $0.16 per share, they far exceeded the market’s prediction. At $494 million, revenues were up 53% from last year and above the consensus forecast. The top-line benefited from the high demand for third-party food delivery services during the lock-down.

Merger Deal

In June, GrubHub agreed to be acquired by Just Eat Takeaway.com in a transaction valued at $7.3 billion, which is expected to close next year. Post-merger, Just Eat Takeaway.com will start operating in the U.S and the combined group will be headquartered in Amsterdam, connecting restaurant partners with customers in about 25 countries. The timing of the deal looks perfect because, as independent entities, it would have taken the companies several years to gain as much traction as they would be gaining together.

Earlier this week, DoorDash went public in a blockbuster IPO, with the stock making sharp gains on the first day. While taking a cue from the elevated demand, the market is also betting on the company’s growth prospects beyond its core business, mainly in logistics. On Friday, the company’s shares traded at $186, more than 80% above the IPO price.

Stock Shines

The performance of GrubHub’s stock has been encouraging in 2020, registering a 64% growth since the beginning of the year. The recovery from last year’s multi-year lows was steady and the trend will likely continue. After Wednesday’s rally, the shares lost a part of the momentum in the following sessions.