Is Amazon's New Invention A GrubHub-Killer? Not Quite, But It'll Hurt

• GrubHub Inc GRUB shares are down 22 percent year-to-date, after reaching a high of $47.18 on April 24.
• Cowen & Company’s Kevin Kopelman maintained a Market Perform rating on the company, while reducing the price target from $30 to $25.
• The entry of Amazon.com, Inc. AMZN into restaurant delivery is too small to have a meaningful impact in the short term, while it could be highly cannibalistic in the long term, Kopelman believes.

Analyst Keith Kopelman mentioned that Amazon (Outperform rated) has rolled out restaurant delivery to its Prime subscribers in Seattle as part of the Prime Now mobile application. He believes that the Amazon launch, although surprisingly strong on both selection and low fees, is too small at present to have a meaningful impact on GrubHub.

Once Amazon expands the service into other Prime Now markets, including New York, which appears inevitable, the true impact will be felt. “We expect growth at Amazon Restaurants to be highly cannibalistic to GrubHub order growth, which has already been slowing this year due to increased competition,” Kopelman stated.

Amazon is expected to expand this service into various other regions as is evident from its recent job openings for building out restaurant relationships. The Cowen & Company report added, “Amazon should be able to replicate its restaurants launch in Seattle in other Prime Now markets. We note the rollout of Prime Now 1-hour delivery has been relatively speedy.”

Courier Model

Kopelman noted that Amazon’s entry into the restaurant delivery segment also highlights the shift to the courier model, where GrubHub has underinvested. It is estimated that “GrubHub's courier-based competitors, not including Amazon Restaurants, will reach a $500M food sales run-rate by Q4:15E, vs. GrubHub's projection of $75M for its core courier build out.”

Expressing caution over GrubHub’s FY16 outlook, Kopelman said, “We see risk to our 20% order growth projection and remain 10% below consensus on EBITDA at $134M.”