Cowen Downgrades GrubHub Amid 'Worse Than Feared Competitive Inroads'

In a report published Monday, Cowen analyst Kevin Kopelman downgraded shares of GrubHub Inc GRUB to Market Perform from Outperform with a price target slashed to $30 from a previous $39 as the analyst observed "surprising" competitive inroads and saturation in key markets.

Competitive Challenges

Kopelman conducted a proprietary delivery survey that concluded GrubHub's competitors include Postmates, DoorDash and others offer a "differentiated and superior user experience." In addition, Uber is expanding its UberEATS initiative while Yelp Inc YELP has "aggressively" entered the space following its Eat24 acquisition.

Kopelman stated that he is "increasingly concerned" as GrubHub's first mover advantage is now "eroding in the face of new delivery models."

Concerns Out Of New York, San Francisco

Kopelman's survey targeted 900 delivery orders in GrubHub's two key markets (New York City and Chicago) and a key "battleground market" (San Francisco) that account for 70 to 80 percent of total revenue.

The analyst found that in GrubHub's Manhattan "stronghold," 40 percent of high volume customers have indicated they recently begun shifting some orders to new competitors, some of which have launched in the past few months.

In San Francisco, several of GrubHub's "hyper-growth" competitors are generating three times the delivery volume of GrubHub. Kopelman stated this is "alarming" as the San Francisco market is traditionally an "indicator" of future internet service adoption trends.

What All This Means?

Kopelman concluded from his survey that respondents' "strong preference" for food quality (three times greater than low fees and selection) appears to leave GrubHub "strategically misaligned" to realize future growth, especially when considering the company's Restaurant-Based Pricing strategy often promotes "poorly-rated" restaurants.

Following the survey, Kopelman revised his full year fiscal 2016 estimates and now expects GrubHub to earn $0.75 per share (versus a prior estimate of $0.81) on revenue of $462.1 million (versus a prior estimate of $472.4 million) and an EBITDA of $134.2 million (versus a prior estimate of $143.2 million).