The thing that is exciting about many of the stocks that have come to be referred to as “Gig Economy” stocks, and that understandably draws in average investors as well as seasoned market veterans, is that many of these companies make their mark by introducing the world to a new way to use technology in a practical way – a way that changes consumer behavior and creates entirely new business opportunities for large and small companies alike. I started this week by reviewing the fundamental and value profile for Dropbox, Inc. (DBX), one of dozens of tech companies in the last few years that have gone public on the wave of optimism over the “Gig Economy”, and today I’d like to take a look at another name that most people should be familiar with.
We don’t have to look that far back into history to understand the attraction to the “next big thing” that I’m driving at; in the last decade, social media went from a curiosity to a full-scale industry all by itself. Companies like Facebook (FB), Twitter (TWTR) and LinkedIn, to name just a few didn’t just carve out a useful niche for themselves; they proved that it is possible to create a legitimate, sustainable revenue and profit stream based on society’s need to connect with each other. The success of those companies, and many of “dot-com” stocks of the 1990’s, are just a handful of examples of the biggest reason Gig Economy stocks are intriguing now; everybody is looking for the next up-and-comer that will grow into an industry titan.
The real question, of course is how do you tell which companies will prove to have the staying power to become the next Alphabet (GOOGL), Amazon (AMZN) or Facebook? There’s no way to predict that for sure; the only thing you can say for certain is that no matter what these stocks, or their specialized industry looks like today, it will be different just a few years down the road. Google, Yahoo! and other search engines of the 1990’s and the early 2000’s are a terrific example. During the dot-com boom, Yahoo! was the industry darling, with other search companies like Altavista and Lycos not far behind. Google was a latecomer that some people dismissed; after all, all it was nothing more than a single page with a basic search box. There were no other features or tools offered on the Google home page.
Today, search is a taken-for-granted aspect of the World Wide Web, but one that Google has established a nearly absolute dominance over. They also validated search as a revenue generation tool, something that the earlier companies struggled to define clearly and to implement successfully. Google isn’t the only player; Yahoo is still around, for example. But isn’t it interesting that while Google took over the industry, and even found new ways to expand its reach into a dominant player in multiple segments of the tech sector, Yahoo’s survival came down to being acquired by Time Warner. How about Lycos or Altavista? Long gone. Therein lies the risk of looking for the next big player in an emerging industry – if you’re wrong, you could lose your entire investment.
Grubhub Inc. (GRUB) is a great example of the kind innovative company that has found a way to establish a useful niche in the Gig Economy. The idea of online food ordering and even delivery isn’t particularly new; but GRUB is one of the first stocks to actually figure out a way to turn it into a useful, sustainable business model. Does that mean they have a better chance than other Gig Economy stocks to stand the test of time, or will they just be another in a long line of “where are they now” stories ten years down the road? Let’s run the numbers and take a look.
Fundamental and Value Profile
Grubhub Inc. provides an online and mobile platform for restaurant pick-up and delivery orders. Its products include Grubhub and Seamless Mobile Applications and Mobile Website, Grubhub and Seamless Websites, Corporate Program, Delivery, Allmenus and MenuPages, Grubhub for Restaurants, and Restaurant Websites. As of December 31, 2016, the Company connected more than 50,000 local restaurants with diners in more than 1,100 cities across the United States. In certain markets, the Company also provides delivery services to restaurants on its platform that do not have their own delivery operations. The Company provides diners on the platform with a personalized platform that helps them search for local restaurants and then place an order from an Internet-connected device. It also provides diners with information about their orders and status. The Company also provides delivery services to restaurants on its platform that do not have their own delivery operations. GRUB’s current market cap is about $5.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased -61% while sales increased by a little more than 39%. In the last quarter, earnings increased by more than 300% (not a typo) while revenues were more modest, increasing a little over 12.5%. Despite the recent, impressive earnings numbers, GRUB operates with a very narrow, but positive margin profile; Net Income versus Revenues over both the past year was 4.94%, but narrowed in the last quarter to 2.12%.
Free Cash Flow: GRUB’s free cash flow is minimal, at only about $87 million. That translates to a Free Cash Flow Yield of only 1.46%.
Debt to Equity: GRUB has a debt/equity ratio of .28. Under most circumstances, this is a low number, but the story it doesn’t tell for GRUB is the fact that the company has twice as much debt as it does cash. GRUB’s balance sheet for the last quarter shows $204 million in cash and liquid assets versus $410 million in long-term debt. It does appear that the company should have no problem right now servicing their debt; but with a razor-thin margin profile, they really have no room for error. This reality also calls into question how effectively the company will be able to look for and develop new ways to expand their business beyond their core. This is a question that all innovators have to answer sooner or later, and that differentiates the Facebooks of an industry from the MySpaces.
Dividend: GRUB does not pay a dividend, which is normal for stocks in their industry.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for GRUB is $16.03, and which translates to a Price/Book ratio of 3.92 at the stock’s current price. The stock’s historical average Price/Book ratio is 4.12, which puts the stock’s long-term target price at around $66 per share as a “fair value” reference point. The stock would need to drop to about $53 to be considered undervalued in any kind of realistic sense.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s downward trend from the stock’s peak in September of last year at about $149.40 to its bottom in mid-May at around $60 per share. It also provides the range to calculate the Fibonacci retracement lines shown on the right side of the chart. Since the beginning of April, the stock has been building a consolidation range between $60 for support and about $74 for resistance. That range has been narrowing significantly in the last month, with resistance now a little above $67 per share, while support remains around $60. That narrowing range generally implies an increasing chance the stock will break out sooner than later. You can think of it like a spring that become more and more tightly wound – at some point, there is just too mention tensile energy built up for the coil to hold its current form. The energy has to go somewhere, and so whether the stock will break above or below the range is a toss-up, but when the break comes, it will likely be volatile. If it breaks above, the stock could see short-term momentum all the way to $74 at least, and possible to nearly $88 per share before it finds any new, significant resistance. If it breaks below, it will establish a new all-time low for the stock, which means forecasting the next bottom is difficult; but you can use the $14 distance between $74 and $60 to provide a ballpark figure, which could put the downside risk at around $46 per share.
Near-term Keys: It’s hard to describe GRUB as a stock that offers any kind of interesting value right now – but it’s also worth pointing out that the stock has only been public since 2015, which means that many of the fundamental metrics I use are still being established. The fact is that the company is profitable right now, and the value proposition could shift dramatically, and quickly if a few of those metrics, like Net Income and Free Cash Flow start to show a pattern of regular improvement. If GRUB can manage to show that kind of improvement, then the idea that the stock could be around for the long-term, and even emerge as an industry leader becomes a lot more valid. If you’re willing to be aggressive, the stock’s narrowing consolidation range should make the stock worth paying attention to in the short-term. Use a break below $60 as a signal to consider shorting the stock or working with put options with a target low price between $55 and $50 (to be conservative with your profit target), and a positive break to $75 as a strong signal to buy the stock or start working with call options with a short-term target price at around $88 per share.