RBC Upgrades GrubHub On 'Attractive' Model And Large Market Opportunity

In a report published Thursday, RBC Capital analyst Rohit Kulkarni upgraded the rating on

from Sector Perform to Outperform, while lowering the price target from $46 to $42, following the over 30 percent pullback in the stock recently, and due to the company's attractive business model. "GRUB shares have traded down 30+ percent from recent highs, largely due to guidance hinting at an accelerating spend outlook to expand its delivery services footprint," Kulkarni said, adding that investors appear to be primarily focused on two key issues. The first issue that investors are likely to be concerned about is whether the company will be able to expand its margins in 2016. However, according to the RBC Capital report, "In 2015, GRUB is planning to invest $10MM to expand its delivery services footprint. Coupled with recent acquisitions with "low-teens" mature EBITDA margins, the Street is now modeling a modest decline in margins Y/Y from 2014 levels." On the other hand, the analyst believes that GrubHub could continue to expand its margins as long as the company is able to drive increasing diner engagement, which in turn would lead to incremental orders versus spend in the delivery services. The second issue that is likely to be a focus for investors is whether the company has a sustainable competitive advantage. "While competition from both larger public companies and smaller VC-funded players appears to be growing, we think GrubHub will continue to be a leader," Kulkarni stated, based on the fact that GrubHub has national scale, which offers "efficient diner acquisition costs." In addition, the company exclusively focuses on its core offering, which possibly leads to "deeper, non-trivial software integration with restaurants." Also, while online food delivery entails low technical entry barriers as well as low switching costs for restaurants, "we think GrubHub's scale becomes a barrier for restaurants to exit," Kulkarni added. The analyst believes that at the current levels, the stock offers a compelling risk/reward, although there could be some downside risk if margins decline.