Grubhub – The end begins.

Grubhub clearly demonstrates a lack of barriers.

• Grubhub reported reasonable Q3 2019 results compared to already lowered expectations but took expectations even further down in a clear demonstration that there are no barriers in this brutal business.
• Grubhub Q3 19 revenues / EPS were $322.1m / $0.01 both below consensus of $330.0m / $0.02 but not enough to trigger the share price rout of 43.3% that was experienced on 28^th October.
• This came from the guidance which took already lowered expectations even further along on their downward slide.
• Q4 19 revenues / EBITDA are expected to be $315m – $335m (midpoint $325m) / $15m – $25m (midpoint $20m) some 16% and 75% short of forecasts respectively.
• Q4 19 consensus revenue / EBITDA was $387m / $79m.
• The company is still growing as both active users and Q3 19 revenues increased by around 30% YoY.
• The problem is that the company is having to give away all of its profitability to keep that growth going in the face of brutal competition because there are no barriers to entry.
• Furthermore, the company freely admitted that food delivery is now fully commoditised and that its users regularly use the services of its competitors.
• In essence, the company has admitted that it has no barriers to entry meaning that it is now going to be a race to the bottom where the company with deepest pockets is likely to end up winning the market.
• Despite being one of the early movers, Grubhub has been unable to reach the hallowed status of being dominant in its market.
• This would have meant that it would have become the go-to place to buy and sell take-away food allowing it to increase its prices somewhat and make a good return.
• In order to achieve this, it would have needed to hold onto 60% market share or be at least twice the size of its nearest competitor.
• This remains my rule of thumb for network-based businesses which appears to be as true today as it was in 2015 when I first proposed it (see here).
• To make matters worse, Grubhub is under siege from a series of venture-backed businesses (with the exception of UberEats) which effectively means they are competing with free money and do not have to show a profit.
• By contrast, Grubhub has to bear the harsh judgement of the market every quarter which has so far delivered a verdict that has taken 77% off the market cap since the end of August 2018.
• This will make restaurant owners increasing concerned with Grubhub’s long term viability meaning that they will increasingly seek to list elsewhere or with multiple sites.
• This, in turn, will lead to further earnings misses and so on as Grubhub enters the vicious cycle of the downward spiral meaning that there is worse to come.
• The net result is likely to be Grubhub being acquired for a fraction of even the current valuation.
• Consequently, anyone still in the shares should take the opportunity to cut their losses now as the free fall is far from over.