Wall Street casts doubt on GrubHub's growth plan; shares tank

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© Reuters. Wall Street casts doubt on GrubHub's growth plan; shares tank© Reuters. Wall Street casts doubt on GrubHub’s growth plan; shares tank

(Reuters) – GrubHub Inc’s (N:) plan to expand its network will need a lot of money and take years to realize, Wall Street analysts said on Tuesday, casting doubts on the online food delivery company’s ability to improve profits in the face of burgeoning competition.

Shares of GrubHub slumped 34% in early trading, after it forecasted slowing revenue growth for the fourth quarter, pushing at least two brokerages to downgrade the stock and cut their price targets.

“Most concerning is that the new strategic plan is unproven, creating greater uncertainty,” Guggenheim analysts said, shedding their rating on the stock to “neutral” from “buy”.

GrubHub, one of the early pioneers in the industry, has been battling growing competition from startups such as DoorDash and Uber Technologies’ (N:) Uber Eats.

In response, the company has spent heavily on promotions to attract customers. The Chicago-based company has also tried to increase its market share by partnering with various companies, including a recent deal with Dunkin’ Brands Group Inc (O:).

In a letter to shareholders on Monday, Chief Executive Officer Matt Maloney said diners were becoming “more promiscuous” and that the company would reduce its advertising spending and instead focus on growing the number of brands on its platform by adding non-partnered restaurants. (https://s2.q4cdn.com/772508021/files/doc_financials/2019/q3/October-2019-Shareholder-Letter.pdf)

“We will be moving quickly, spending more and trying many different strategies over the next 12-18 months to increase restaurant supply aggressively while making our diner experience more sticky – effectively taking action to remove any reason for diners to look anywhere else.”

Typically, online food delivery often has one clear winner as users download and use only one app, constricting the market to one or two major players.

BTIG analyst Peter Saleh said GrubHub’s strategy to invest more to add restaurants and increase customer loyalty through various rewards and incentive programs could take several years to bear fruit – and will not be well received by investors.

Shares of GrubHub were trading at $38.50 before the bell, significantly below the stock’s median price target of $86. If premarket losses hold, the stock would have its worst day ever and open the lowest in over two years.

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