Having dropped nearly 45%, Grubhub Inc. (GRUB, Financial) might as well have told Wall Street that it was going out of business, instead of having announced what appears to be candid and conservative guidance.
In just two days following its third-quarter earnings release, Â Wall Street analysts have downgraded their ratings on the Chicago-based mobile food delivery platform. Despite meeting earnings expectations for its recent quarter, the market’s reaction was relentless. Short sellers have reaped a $504 million profit as a result of this massive price drop.
In contrast to this dire Wall Street reaction, Grubhub actually reported a 30% increase in revenue for its recent quarter. At the same time, costs and expenses have risen so much that it has left the company with only a third of a percent margin for the quarter compared to 9% a year ago. This significant profit reduction may have stirred Wall Street’s 180 degree outlook on the stock.
Grubhub reported increasing competition has affected its growth. The company’s reduced estimates for the fourth quarter also did not help any of its loyal stockholders.
The company stated that it would report a wider loss—$34 million or more —in the coming quarter compared to the same period a year ago; while its adjusted earnings before tax (Ebitda) figure would be somewhere between $15 million and $25 million—at midpoint, that would mark a 52% drop from the previous year.
More broadly, Wall Street analysts have gone against their bullish call on Grubhub and trimmed 60% to 80% off their price targets. For example, an analyst from the renowned investment bank Goldman Sachs (GS, Financial) admitted that it was wrong on the stock and cut its price target from $86 a share to $30— a 65% correction—a day after the food delivery app reported its figures.
At low to mid-$30s per share price levels, Grubhub now trades at price-sales ratio of 2.6 and is 70% lower than its five-year average. Although seeing the company's stock trade at historically high multiples—about $289 a share—may seem unrealistic, this simple calculation indicates there is some potential upside to the beaten-down, high-growth fast-food delivery stock.
Being prudent with its balance sheet—0.4 times debt-equity as of the recent quarter—and having partnered with large fast-food chains (McDonald’s, Applebee’s, iHOP and Shake Shack), it may still be too early to totally bail on the the fast-growing company. Moreover, these partnerships still offer potential future repeat customers and could still help Grubhub meet and potentially exceed expectations down the road.
Disclosure: Long Grubhub.
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