Shares of online food ordering website GrubHub (GRUB) went public last week. Apparently, investors had a major craving for the stock. In its first day of trading, GRUB surged more than 30%, giving the company a market cap of $2.7 billion. Is this stock really investable or just another disappointment in the making?
GrubHub provides an online food order platform to over 28,800 independent restaurants across 600 cities. GrubHub's ambition is to replace a draw full of takeout menus. According to Euromonitor, Americans spent $204 billion at approximately 350,000 independent restaurants in 2012. Of that total, GrubHub believes $67 billion was for takeout.
As of December 31, the company had 3.4 million active diners in its database and processed more than 135,000 "Daily Average Grubs" -- which are defined as customers completing a takeout order.
GrubHub earns a commission for each order placed through its website or mobile app. About 43% of its customers place their order through a mobile device. Restaurants that pay a higher commission rank higher in the company's search algorithm.
Investors may be surprised to learn that GrubHub's business is highly seasonal. Business drops off from May to August (probably as college kids go home for the summer) and picks back up in September. The company also does the majority of its business in New York City, Chicago and San Francisco.
Wall Street's insatiable appetite for a company that is basically a menu database is a bit puzzling to me. In 2013, a company called Seamless was spun out of food service giant Aramark (ARMK) and merged with the smaller GrubHub. After the merger, the combined company was offered for sale to investors. Seamless started out in the 1990s as a convenient way for college kids to pay for lunch through Aramark's catering business.
GrubHub has had dramatic growth over the last three years. Revenue has gone from $60.6 million in fiscal 2011 to $137.1 million by 2013. That's a compound annualized growth rate of 31.2%. But during that time, expenses grew faster than revenue. That's a big red flag to me. Expenses grew 34.1% to $122 million. Perhaps, that was a one-time event? Maybe hefty merger expenses took their toll on the bottom line? But I'd be interested to know if it's a trend.
In 2013, net income as a percentage of revenue was just 5%. That's down from 25% in 2011. Why? Shouldn't they be getting more profitable?
I also wonder why Aramark is suing the company for patent infringement. At the time of the spin, Seamless had material weakness in its internal financial controls for the years 2011 and 2012. Yet, both companies saw past that, merged and now their former parent company is suing them. Why?
Replacing a junk draw full of takeout menus is a great idea, but to me, it really isn't a stand-alone company. I think GrubHub would be a perfect acquisition candidate for OpenTable (OPEN). They could merge the table reservation and takeout menu business.
Until that time, I'll stay on the sidelines and just order up some Kung Pow chicken.