(Reuters) - GrubHub Inc’s (GRUB.N) plan to expand its network will need heavy investments and take years to realize, analysts said on Tuesday, casting doubts on the online food delivery company’s ability to boost profits in the face of burgeoning competition.
Shares of the company crashed 42%, after it forecast slowing revenue growth for the fourth quarter, pushing at least two brokerages to downgrade the stock and cut their price targets.
The stock was trading at $33.60 in afternoon trade - set to wipe out more than $2 billion in market value - and a far cry from the median price target of $86. The stock plunged to its lowest level in more than three years earlier in the session.
“Most concerning is that the new strategic plan is unproven, creating greater uncertainty,” Guggenheim analysts said, downgrading the stock to “neutral” from “buy”.
GrubHub, one of the pioneers in the industry, has been battling growing competition from startups such as DoorDash and Uber Technologies’ (UBER.N) Uber Eats.
In response, the Chicago-based company has spent heavily on promotions and has also tried to increase market share by striking partnerships, including a recent deal with Dunkin’ Brands Group Inc (DNKN.O).
BofA Merrill Lynch analysts said the food delivery market was growing increasingly irrational as competitors flood the market with rewards and incentives, making online diners less loyal.
“GRUB’s answer to this irrationality, however, seems confusing. Its management letter seems to suggest that it will double down on its competitors’ poor economic decisions,” the analysts added.
Diners were becoming "more promiscuous" and the company would reduce its advertising spending and instead focus on growing the number of brands on its platform by adding non-partnered restaurants, Chief Executive Officer Matt Maloney said in a letter to shareholders on Monday. (bit.ly/2WkUQl2)
“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.
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, said BTIG analyst Peter Saleh.
Reporting by Akanksha Rana, Tanvi Mehta and Noor Zainab Hussain in Bengaluru; Editing by Bernard Orr, Sweta Singh and Sriraj Kalluvila