Grubhub (GRUB, Financial), the $4.54 billion Illinois-based online food-ordering company, reported reported 36% year-over-year revenue growth to $314.9 million and 43% profit rise to $32.47 million in the second quarter, resulting in a 10.3% margin compared to 9.8% in the prior year.
Despite the 39.1% rise in total costs and expenses in Grubhub’s operations, the company still recorded impressive profitability for the period.
Grubhub also provided guidance figures and expects fiscal 2017 profit in the range of $55.1 million and $61 million –Â 16% rise from fiscal year 2016.
"Grubhub strives to be the most comprehensive marketplace connecting online takeout diners and restaurants. We continued to execute well in the second quarter with strong active diner growth and thousands of new, high-quality restaurants.
"In addition, we signed long-term partnerships with Yelp and Groupon to be their preferred online ordering engine, agreeing to purchase Eat24 and select OrderUp markets in the process to add scale, diners and restaurants and drive more volume to our restaurant partners." –Â CEO Matt Maloney
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Valuations
Grubhub is overvalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 79.7 times vs. the industry median of 33.2 times, a price-book (P/B) ratio of 4.5 times vs. 3.4 times and a price-sales (P/S) ratio of 8.5 times vs. 2.7 times.
The company does not pay a dividend.
Average 2017 revenue and earnings-per-share estimates indicated forward multiples of 6.9 times and 47.8 times.
Total returns
Grubhub has outperformed the broader Standard & Poor's 500 index so far this year having generated 39.9% total returns vs. the index’s 11.9%.
Gubhub
According to filings, Grubhub was founded in 2004 and Seamless was founded in 1999. The merger of Grubhub Holdings Inc., Seamless North America LLC and Seamless Holdings Corp. was completed in August 2013.
In April 2014, Grubhub completed an initial public offering. The company raised about $190 million in the offering compared to today’s market capitalization of $4.5 billion.
In February 2015, Grubhub acquired the assets of DiningIn.com, Inc. and certain of its affiliates and the membership units of Restaurants on the Run LLC.
In December 2015, the company acquired the membership units of Mealport USA LLC doing business as Delivered Dish.
In May 2016, Grubhub acquired all of the issued and outstanding capital stock of KMLEE Investments Inc. and LABite.com Inc., a restaurant delivery service.
Further, Grubhub is the leading online and mobile platform for restaurant pick-up and delivery orders, which the company refers to as takeout.
The company connects more than 50,000 local restaurants with hungry diners in more than 1,100 cities across the U.S. and is focused on transforming the takeout experience.
Grubhub generates higher margin takeout orders at full menu prices. The Grubhub platform empowers diners with a “direct line” into the kitchen, avoiding the inefficiencies, inaccuracies and frustrations associated with paper menus and phone orders.
For restaurants, takeout enables them to grow their businesses without adding seating capacity or wait staff. Advertising for takeout, typically done through the distribution of menus to local households or advertisements in local publications, is often inefficient and requires upfront payment with no certainty of success. In contrast, Grubhub provides restaurants on its platform with an efficient way to generate more takeout orders.
Grubhub enables restaurants to access local diners at the moment when those diners are hungry and ready to purchase takeout. In addition, the company does not charge the restaurants in its network any upfront or subscription fees, does not require any discounts from their full price menus and only gets paid for the orders the company generates for them, providing restaurants with a low-risk, high-return solution.
Grubhub charges restaurants a per-order commission that is primarily percentage-based. In many markets, the company also provides delivery services to restaurants on its platform that do not have their own delivery operations for diners (1).
As of December 2016, Grubhub was providing delivery services in approximately 70 markets across the U.S.
In addition, the proliferation of mobile devices over the past few years has significantly increased the value of the Grubhub platform.
From the first quarter of 2014 to the fourth quarter of 2016, mobile orders have increased from 44% to Ă‚ 65% of total consumer orders generated through the Grubhub and Seamless brands.
The company generates revenues primarily when diners place orders on its platform. Restaurants pay a commission, typically a percentage of the transaction on orders that are processed through the company’s platform.
Key operating metrics
Active diners
Grubhub counts active diners as the number of unique diner accounts from which an order has been placed in the past 12 months through its platform (3).
Diner accounts from which an order has been placed on one of Grubhub's Web sites or one of its mobile applications are included in its metrics.
In the recent first half, active diners rose 24.8% year over year to 9.18 million compared to the year prior.
Daily average grubs
Grubhub counts daily average grubs as the number of revenue-generating orders placed on its platform divided by the number of days for a given period.
In the first half, daily average rose 18.4% year over year to 319,200 from the year prior.
Gross food sales (millions)
Grubhub calculates gross food sales as the total value of food, beverages, taxes, prepaid gratuities and any delivery fees processed through its platform.
The company includes all revenue-generating orders placed on the Grubhub platform.
In the first half, Grubhub’s gross food sales rose 23% year over year to $1.78 billion from last year.
Sales and profits
In the past three years, Grubhub had revenue growth average of 53.2%, profit increase average of 94.4% and profit margin average of 10%.
Cash, debt and book value
As of June, Grubhub had $293.3 million in cash and cash equivalents and zero debt. Of the company’s $1.25 billion assets 60%Â were identified as blue sky elements such as goodwill and intangibles while book value grew 11.9% year over year to $1.03 billion.
Cash flow
In the first half, Grubhub’s cash flow from operations climbed 82% year over year to $67.8 million. In addition to higher profits, the company had higher cash flow in relation to its accounts receivables, prepaid expenses and other accruals among others.
Capital expenditures were $16.9 million leaving Grubhub with $50.9 million in free cash flow compared to $23.45 million in the same period last year. The company did not take nor repaid any debt nor performed any repurchases in the period.
The cash flow summary
In the past three years, Grubhub allocated $55 million in capital expenditures, raised $128 million in share issuances net repurchases ($15 million in 2015) and generated $160 million in free cash flow.
Conclusion
Certainly Grubhub exemplifies a high-growth company having averaged high teens to mid-20 percentage point growth rates in company defined metrics in its businesses, and in this case reflected in its profit figures for the recent half-year results.
In addition, the company has kept a strong balance sheet with zero debt with high amount of blue sky elements. Cash flow also has remained steady.
Average analyst share price target was $48.15 per share vs. $52.62 at the time of writing. Average revenue estimates multiplied with three-year average P/S multiple followed by a 15% margin indicated a figure of $56.3 per share.
In summary, Grubhub trades at par with the estimated value calculated here. The company is a hold.
Notes
(1) Company filings
For diners, the traditional takeout ordering process is often a frustrating experience –Â from using paper menus to communicating an order by phone to a busy restaurant employee. In contrast, ordering on Grubhub is enjoyable and a dramatic improvement over the “menu drawer.” The company provides diners on the platform with an easy-to-use, intuitive and personalized platform that helps them search for and discover local restaurants and then accurately and efficiently place an order from any Internet-connected device. Grubhub also provides diners with information and transparency about their orders and status and solves problems that may arise. In addition, the company makes re-ordering convenient by storing previous orders, preferences and payment information, helping to promote diner frequency and drive strong repeat business.
(2) Company filings
Most of the restaurants on the company’s platform can choose their level of commission rate, at or above the base rate. A restaurant can choose to pay a higher rate, which affects its prominence and exposure to diners on the platform. Additionally, restaurants that use the company’s delivery services pay an additional commission on the transaction for the use of those services. The company also recognizes as revenue any fees charged to the diner for delivery services it provides. For most orders, diners use a credit card to pay the company for their meal when the order is placed. For these transactions, the company collects the total amount of the diner’s order net of payment processing fees from the payment processor and remits the net proceeds to the restaurant less commission. The company generally accumulates funds and remits the net proceeds to the restaurants on at least a monthly basis. The company also deducts commissions for other transactions that go through its platform, such as cash transactions for restaurants in the network, from the aggregate proceeds received. Additionally, the company provides consolidated invoicing for its corporate program customers generally on a monthly basis.
(3) Company filings
Grubhub: Active diners is an important metric for us because the number of diners using our platform is a key revenue driver and a valuable measure of the size of our engaged diner community. Some of our diners could have more than one account if they were to set up multiple accounts using a different email address for each account. As a result, it is possible that our active diners metric may count certain diners more than once during any given period.
Disclosure: I do not have shares in any of the companies mentioned.
