GrubHub Gets Some Love From DA Davidson, Stephens

Online and mobile food ordering and delivery platform GrubHub Inc GRUB reported third-quarter results Thursday morning that sent shares notably lower throughout the trading session. Despite the sell-off, two research firms are turning more positive on the stock. 

The Analysts

DA Davidson's Tom Forte upgraded GrubHub from Neutral to Buy with a price target lifted from $115 to $120.

Stephens' Will Slabaugh added GrubHub to the firm's "Best Idea" list while maintaining an Overweight rating on the stock with an unchanged $155 price target.

DA Davidson: Attractive Entry Point

GrubHub's stock decline following its Q3 earnings report creates an "attractive" entry point for investors, Forte said in the upgrade note. The bullish case for the stock is based on expectations for a successful ramp in GrubHub's investment spend to "exploit" the food delivery market and realize its full profit potential, he said. 

Two metrics causing investor concerns are likely overblown, the analyst said:

Adjusted EBITDA per order rose 3 percent year-over-year to $1.57 but was down more than 10 percent from the prior quarter. The sequential decline is consistent with management's plans to boost its marketing spend and should fall to $1 in Q4 but rebound to $1.59 for the full year 2019, Forte said. 

Order size growth was just 2.5 percent in the quarter, the lowest recorded in four years. This could be the result of removing and reducing order minimums to drive order volumes, according to DA Davidson. Similar to EBITDA per order, the metric should rebound in 2019 to 2.8 percent, Forte said. 

Related Link: GrubHub's Q2 Shows Continued Growth In Underpenetrated Sector, Says Incrementally Bullish KeyBanc

Stephens: Position Of Strength

GrubHub is well-positioned within the third-party order and delivery space, where market share is up for grabs, Slabaugh said in a Friday note. The company's decision to boost marketing spend by up to an additional $30 million comes at a time when it is operating from a position of strength based on an acceleration of daily active users and diner growth, the analyst said. 

GrubHub's business model is superior to its peers, which should allow the company to distance itself in the competitive landscape, Slabaugh said. GrubHub offers restaurants access to its diner base — which happens to be the largest in the world — and creates a marketplace for restaurants to determine their own level of spend and control customer acquisition costs, he said. 

At a time when restaurants as a whole are showing "stagnant" same-store sales growth, the ability to tap into GrubHub's user base will become increasingly important, according to Stephens. 

Price Action

GrubHub shares were down 8.05 percent at $88.69 at the time of publication Friday. 

Related Link: GrubHub's Brand Is Becoming 'Second Nature' For Food Delivery, Canaccord Says

Photo courtesy of GrubHub.