GrubHub Analysts Debate If Investors Should Buy The 40% Plunge

Food delivery company GrubHub Inc GRUB reported disappointing third-quarter results amid lower order frequency, retention and loyalty rates among active customers.

Here is a summary of how some of the Street's top analysts reacted to the print.

The Analysts

JMP analyst Ronald Josey maintains a Market Perform rating on Grubhub's stock with a $95 price target.

Bank of America analyst Nat Schindler downgrades from Buy to Underperform, price target lowered from $98 to $30.

KeyBanc Capital Markets analyst Andy Hargreaves maintains a Sector Weight.

JMP: What Happened

Grubhub suffered from multiple concerning trends which prompted management to lower its fourth quarter revenue and EBITDA outlook relative to the Street's estimates by 16% and 75%, respectively, Josey wrote in a note. The factors include:

• Management believes the $200 billion food ordering market hit a mature stage amid growing competition, which impacted overall active diner loyalty.
• Daily active Grubs (users) growth among newer diners trended lower than expected, especially in new markets.
• Retention rates also started coming in short of prior cohorts.
• Online diners are now "more promiscuous" given a greater choice of delivery platforms.

BofA: 'Confusing' Response

The online food delivery business is highlighted by irrational rewards and incentives that drive lower loyalty rates, Schindler said. Grubhub's response to this irrationality is "confusing" as it amounts to doubling down on its competitors' poor decisions, including free delivery for quick service restaurants and boosting restaurant counts among non-partners which is a bad decision for both diners and investors.

"We think these strategies and pushing diner rewards and perks should attract customers with lower order frequency and less lifetime value, reducing L.T. profitability while providing little real growth," the analyst wrote in a note.

KeyBanc: 'Key Asset'

Grubhub's slight third-quarter miss and "very weak" outlook suggests the food delivery market hit a geographic saturation dominated by "incredible stiff" competition, Hargreaves said.

As such, Gruhbub's report represents a "shock" to the business and increases uncertainty about the long-term growth and margin profile, the analyst wrote. Nevertheless, Grubhub boasts a strong market position in key cities and its profitability makes it a "key asset in the space."

"However, consolidation may be necessary to rationalize the marketplace, and we have little visibility into the potential for that in the near to medium term," the analyst wrote.

Price Action

Shares of Grubhub were trading lower by more than 43% Tuesday at $32.67.

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Photo courtesy of GrubHub.