Grubhub Stock Gets Jolted Following Candid Report

GrubHub

Companies usually go out of their way to put as positive a spin as they can on their results to stroke their stocks. Grubhub just chose to tell the naked truth, and got slammed.

Food delivery service Grubhub has had their stock listed for over 5 years now, starting out in March 2014 at an opening price of $40 per share. The first 3 years of their life on the exchange wasn’t much to write home about, and they mostly beat around their opening price, other than a trip below $20 early in 2016.

They quickly regained their losses and were back around $40 again later in the year, and hung around there again until the summer of 2017 when things really started to take off. Over the next year, Grubhub’s stock price nearly tripled, but it’s been downhill since, and this hill has been as steep on the way down as it was on the way up.

We are now a little over a year after this peak, and on Monday, the stock closed at $58.39, and considering it was trading at $146.93 before it started to fall, this was already a long way down, 61% to be exact.

When you hold a stock that has lost over 60% in 13 months, that should already be cause for alarm, but then Tuesday’s surprising letter to investors hit the street. In a single day, Grubhub lost over 43% of its value, plunging to $33.11. When the company opens up about how difficult things are and will be, and you lose $20 per share at the open and another $5 as the day goes on for good measure, the pain of holding this company just got a lot worse.

Analysts scrambled to revise their outlook, and in spite of what has happened to Grubhub lately, the consensus had it as a buy or an outperform. We’re not sure what exactly this stock was supposed to outperform lately, but it sure hasn’t done well at all, and it took this one-day implosion for the analysts to finally open their eyes it seems.

Why a stock that had steadily lost 60% in a year could ever be seen as an outperformer is the real story here, the part that should really shock us, instead of a company sharing the struggles of the food delivery business, which was already pretty well known. The market knew it, and that’s why it put Grubhub’s stock price down so much even before this new development. You don’t even have to look at the numbers, as the chart tells enough of a story here, and it is an ugly one indeed.

Sometimes it takes a trained eye to spot things on charts, but with Grubhub, all you needed to know is that, if you are long that is, the line moving up is good and it moving down is bad. Moving down a lot is very bad. When a chart already looks like Mount Everest, and you’ve climbed it and are now back on the ground, that’s not outperformance, it’s simply horrible performance.

There are plenty of dogs out there that have these lofty ratings by analysts, and it’s not always that obvious to the casual observer how far off or how brutally wrong these predictions may be, and they even may think that these people have some sort of special knowledge or even ways of foretelling the future.

When someone is laying on the ground after being shot, he or she may still have a pulse and still be breathing, but if we based our prognosis on just these two factors, we might think that the person will be all right or perhaps even thrive. All the blood on the ground should tell a different story, but if we don’t look, like when we don’t look at charts, we may indeed miss this.

What makes Grubhub stand out so much is the sheer amount of blood that had already been spilled before Tuesday, in a way that calling this stock healthy in any sense should simply be ridiculous. Ridiculous isn’t always an obstacle though with fundamental analysts, as we can clearly see with this example.

Sometimes People Need to be Shocked Awake

Apparently, this report from Grubhub to investors tripped something, because now they are finally getting it, and now see this stock as an underperformer. In spite of how enthusiastic and often biased analysts are on the bullish side, there does seem to be a threshold of damage that is considered to be enough, and this finally got surpassed Tuesday.

We usually don’t see stocks go from the best rating to the worst one in just one day. It is also noteworthy how much price targets got slashed as a result of this. Oppenheimer’s Jason Helfstein cut his rating of Grubhub from outperform to underperform, and also slashed his price target from $91 to $34. It hasn’t traded as high as $91 in over a year, and has moved down ever since, but it is actually close to $34 now, only a little below this at around $33, so this latest target looks far more realistic.

Nat Schindler of Bank of America Merrill Lynch had it at outperform as well, and was telling us he expected it to go to $98, but now sees it valued closer to $31. Once again, dreams got shattered by this company letter but we need to ask ourselves what was in it that would cause a stock to be worth $67 less, especially with the market only knocking off $15.91 as a result.

These analysts have been trying to disagree with the market over the last year, with the stock being seen as very bearish by the market, while the analysts stubbornly clung to whatever it was that had them thinking this was heading back to the 90’s.

It is the market, not the analysts, that get to decide this, and if the market is telling us something, like this stock being so bearish, and we believe that it is very bullish, it is not even that we may have good reasons to believe otherwise, it does not even make sense to have targets like this that simply do not correspond to reality.

Perhaps the market will one day be ready to pay $98 per share for this stock, but that day is at the very least far off. If we see it bottom and the problems become resolved, and people are falling over themselves to buy this again, this may change things, but without this, we’re just fantasizing.

To be fair, Grubhub’s results have been a perfect breeding ground for such a colossal mistake. Grubhub isn’t one of these companies such as Uber and Lyft that are bleeding money, as they have been making plenty of that. Their EBITDA has been rising each year over the last 5, going from $68.97 million in 2014 to $177.8 million in 2018.

Grubhub’s earnings per share for 2019 has added up to 88 cents per share already, which is exactly the amount they earned last year and there is a quarter yet to go. Their 27 cents a share that they just reported in Q3, which met expectations exactly, works out to $1.08 per share in a year, 20 cents better than last year and only 2 cents less than their record year in 2017 when they actually were trading over $98.

If we think that it is this stuff that moves stock prices, and especially if you think that this is the only thing that matters, and you see the price of a stock move in the opposite direction of what these results tell us where it should be, it is at least understandable how we could get pretty confused here.

When Our Heads are Down, We Don’t See What is Coming

The best lesson that we can learn from all this isn’t how wrong analysts can be or how tight they can close their eyes to the realities of a stock, it is just how big of a role the future plays in stock prices. There is a very good reason for the huge deviation we’re seeing with this stock between its business results and its stock price, and the reason is that the future matters a lot more than the present.

When you base your decisions on the present and the very near future, the next quarter basically, you will miss what is beyond this point on the road, which may look clear ahead but there may be some big roadblocks miles down the road or even beyond the next hill.

For Grubhub, the obstacle just beyond the view of fundamental analysts was made clearer Tuesday by Grubhub themselves, but it isn’t something that people weren’t aware of. This is the very reason why the stock lost the 60% it gave up prior to this letter from the company.

The real issue here, things that the bean counters can’t count because it hasn’t really happened yet, is the big margin losses that are expected from both tighter regulation and increasingly cutthroat competition. With Uber Eats sitting at the table, who even negative margins don’t scare, you are up against a beast that is both dangerous to itself and its competitors.

There are a number of other entrants, and what makes the food delivery business different from the ride sharing one is that with food, you make deals with restaurants, and price cutting is therefore more dangerous.

This may very well turn Darwinian, where a company’s ability to withstand losses may end up being the deciding factor. This isn’t just about the bottom line shrinking, as this may even make it go away entirely.

If this were not enough to worry about, upcoming unfavorable regulations such as these companies needing to treat their drivers as employees is a danger to all of the companies. This will take a significant bite out of profits if you hold them, and a bigger bite out of you if you don’t. California already has passed a law that will soon take the first big bite, and this may soon be the norm.

Going from a company with at least some profit that has been steadily growing to wolves howling at the door surely isn’t something that we should ever be optimistic about, thinking that this will present such a favorable situation that the company’s stock should outperform.

The market got it right at least, because the market truly is focused on the road all the way to the end, and accounts for all factors that may impact the perceived value of a stock, and provide us the result. When they see ghosts like they did with Grubhub, we need to be afraid of ghosts as well, especially if the ghosts turn out to be real as they did here.

Robert

Editor, MarketReview.com

Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.

Contact Robert: robert@marketreview.com

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