Cowen Downgrades GrubHub Inc. (GRUB) to Market Perform; Cites Influx of Competitors

Cowen downgraded GrubHub Inc. (NYSE: GRUB) from Outperform to Market Perform with a price target of $30.00 (from $39.00) as competitive inroads are worse than feared.

Analyst Kevin Kopelman commented, "Following our proprietary delivery survey, we are downgrading GrubHub shares on competitive concerns and reducing our price target to $30 from $39. We observed 1) surprising competitive inroads, esp. among high volume Manhattan customers, and 2) saturation in key GrubHub markets. We are lowering FY16E orders to +20% from +25% and see EBITDA risk on investments to regain competitiveness."

Kopelman notes GrubHub competitors have raised $500M YTD, not counting Uber. "Notable players include Postmates, DoorDash, and Caviar in restaurant delivery; Munchery, Sprig, and Maple in 1P food; and Blue Apron and Plated in ready-to-cook meal subscription," the analyst commented. "In addition, Uber is expanding UberEATS, and Yelp has aggressively entered with its acquisition of Eat24."

In addition, the firm's survey makes them more cautious on the company's growth prospects. "In GrubHub's Manhattan stronghold, 40% of high volume customers ('whales') have begun shifting some orders to new competitors, some of whom only launched in the past few months," the analyst notes. "In the Bay Area, GrubHub captured just 20% of online share (Yelp leads), with new entrants experiencing hyper growth. In addition, online saturation was higher than expected -- in Manhattan GrubHub already accounted for 78% of online dollars and 43% of total delivery dollars. Lastly, survey respondents' strong preference for food quality (3X vs. other factors like low fees & selection) appears to leave GrubHub strategically misaligned to capture future growth, particularly given GrubHub's Restaurant-Based Pricing strategy that often promotes poorly-rated restaurants."

Given deteriorating industry dynamics, the firm is less bullish on GrubHub's prospects for stemming the slowdown in orders, which were +29% in Q1 vs. +33% in Q4. They now expect Q2 organic orders +25% (prior +28%), slowing to +23% in 2H (prior +25%) and +20% in FY16 (prior +25%). They are also lowering FY16E EBITDA to $134M ($10M or 7% below consensus) and expect another year of modest margin compression as GrubHub takes steps to regain competitiveness.

For an analyst ratings summary and ratings history on GrubHub Inc. click here. For more ratings news on GrubHub Inc. click here.

Shares of GrubHub Inc. closed at $33.79 yesterday.

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