GrubHub (GRUB 101.58, -8.04, -7.33%) is trading lower today after reporting Q3
results/guidance this morning. GrubHub is the largest online and mobile
platform for takeout and delivery of takeout restaurant orders. It connects
diners with over 75,000 independent restaurants. The company's primary revenue
source is a 15% commission fee that is paid by the restaurant on each order.
The Q3 results were pretty good as non-GAAP EPS rose 61% yr/yr to $0.45, which was better than expected. Revenue rose 51.6% year/year to $247.2 mln, well above prior guidance of $232-240 mln. Adjusted EBITDA rose 41% yr/yr to $60.1 mln, in-line with prior guidance of $58-64 mln but a bit below market expectations.
So, while Q3 was pretty good, a big reason the stock is down is the Q4 guidance. The revenue guidance at $283-293 mln is better than expected. However, the Q4 adjusted EBITDA guidance of just $40-50 mln is well below market expectations. It's also a big sequential drop-off from Q3's $60.1 mln result.
That's not all. GRUB also announced that its COO Stan Chia has tendered his resignation, effective Nov 16, to pursue another opportunity. GRUB stresses that “the resignation was not a result of any disagreement with the company or any matter relating to its operations, policies, or procedures. The company is eliminating the position of COO.”
So what is going on with that Q4 adjusted EBITDA guidance? You would think with an expected sequential increase in revenue in Q4, that adjusted EBITDA would also rise, but a big drop is expected. GRUB is saying it will invest an incremental $20-30 mln in marketing and delivery expansion in Q4.
Perhaps this is not a huge surprise as, on October 17, Grubhub announced it would expand delivery capabilities to dozens of new markets across 19 states nationwide. These new markets join others announced earlier this year, totaling more than 100 new markets in 2018. With Grubhub delivery, restaurants without their own delivery capabilities now will be able to leverage Grubhub's large network of drivers.
Another wrinkle here is that GrubHub has been active on the M&A front. In September, GRUB announced it will acquire Tapingo, a platform for campus food ordering. Also, in Sept, GRUB closed on its acquisition of LevelUp, which has a mobile platform that makes it easier for restaurants to integrate with the Grubhub marketplace. In 2017, GRUB acquired Yelp's Eat24 business (a rival to GRUB) and Yelp integrated online ordering from all GrubHub restaurants onto its extensive platform. This has been a lot to digest. It seems GRUB wants to leverage all these new services in new markets to fully take advantage of the opportunity. In particular, Tapingo focuses on college campuses and several of these new markets are college towns.
In sum, the stock is taking a big hit today, but it has recovered somewhat off its lows (stock had briefly dipped to the $90 area). GRUB has a history of strong beat-and-raise quarters, so this weak EBITDA guidance is spooking investors a bit. However, it makes sense for GRUB to do this and is probably a good idea in the long run. There are costs for GRUB when it enters new markets but these will result in new revenue opportunities down the road.
- OUR VIEW
- LEARNING CENTER