Morgan Stanley Downgrades GrubHub, 'Still Optimistic But See Delivery As Now Taking More Time'

Morgan Stanley’s Dean J. Prissman expressed concern regarding whether GrubHub Inc’s GRUB Delivery business would be able to reignite growth in the near to medium term.

The analyst downgraded the rating on the company from Overweight to Equal-weight, while lowering the price target from $37 to $30.

Delivery Business Will Take Time

“Our core long-term thesis on GrubHub has been the business remains an open-ended growth story, given a modest 6% penetration of its addressable user base, and with an ability to expand margins to 35% longer-term,” Prissman explained.

The analyst also believes that the business is resilient against competition, due to GrubHub’s best in class offering, its especially “sticky” users and an operating model for deliver that balances the interest of all three parties, i.e., users, restaurants and couriers.

Prissman elaborated that the only things that had changed was the “near-to-medium term conviction in the timing for GRUB to reignite the growth of its business from Delivery.”

Challenges

The analyst believes that a fundamental challenge for the company is the number of restaurants in the U.S. that offer deliver, given the low population density as compared to other markets, such as the U.K.

Therefore, “to re-ignite growth, particularly in non-New York markets, GRUB launched its own last-mile delivery service,” the analyst stated.

Prissman had earlier expected this service to drive a significant increase in high quality supply, and would have meaningfully impacted the company’s financials in 2016.

“While we do note GrubHub is pointing to an acceleration in order volume growth in 2Q16, given the modest magnitude, for now, we err on the side of conservatism and move to the sidelines,” Prissman added.

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