Why GrubHub Inc Stock Dropped 11% in October

By Jeremy BowmanMarketsFool.com

Image Source: GrubHub.

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What happened

Investors were dumping shares of GrubHub Inc.(NYSE: GRUB) last month after the number of active diners the company reported in its third-quarter earnings report came up short. Shares of the food-delivery specialist finished the month down 11% according to data from S&P Global Market Intelligence. As the chart below shows, the stock plunged after the report came out on October 26.

GRUB data by YCharts

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So what

Financial results in the quarter were actually strong, but as is common in the tech industry, investors were more interested in the number of users.

Revenue in the quarter was up 44% to $123.5 million, topping expectations of $118.3 million, while earnings per share jumped 77% to $0.23, beating the consensus at $0.19. CEO Matt Maloney said, "We are pleased withGrubhub'sthird quarter growth, as we continue building the most comprehensive marketplace for restaurants and takeout diners. Our product improvements and investment in delivery continue to generate high levels of sustainable growth."

Despite the 44% increase in revenue, active diners were only up 19% to 7.69 million, while daily average orders hit 267,500. Since user growth is not keeping up with revenue, GrubHub will struggle to maintain the current revenue growth rate, as it's been able to boost the latter by getting current users to spend more. That will only go so far. In order to drive long-term growth, it would be better off attracting more new users.

Now what

Looking ahead, GrubHub guided fourth-quarter revenue at $136-$138 million, in line with analyst estimates at $137.5 million and up 37.6% from a year ago. The Seamless parent also said it expected $38-$40 million in Adjusted EBITDA in the current quarter.

GrubHub's growth and profitability remain strong, but the company is valued at a P/E of 42 based on this year's earnings and operates in a highly competitive industry. The stock has also gained 57% year-to-date, so the post-earnings pullback may have been partly a correction after an impressive run this year. GrubHub management is executing its plan effectively, but if active-diner growth continues to slow, I'd expect more trouble for the stock.

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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.