In the midst of an abysmal past two weeks on Wall Street, a mobile food ordering app, GrubHub (GRUB), went public. Last Friday (April 11) CEO Matt Maloney overlooked the NYSE trading floor to witness the results of his company’s IPO. Initial investor demand was so high that the company raised its initial offering target price from $20-22 to $23-25, and saw its stock shoot up 50% to $39 before eventually ending the day around $34.
GrubHub is a mobile food-ordering app for IOS and Android devices. It allows users to purchase takeout from over 28,000 restaurants in 600 cities. GrubHub is a revolutionary company in that it caters to smaller restaurants that don’t have the capital to develop their own mobile takeout apps. To generate revenue, GrubHub simply charges restaurants that list with them a commission on every order made via its app.
Since its IPO, GrubHub’s stock price has trended upward, and closed at over $37 on April 16th. In its S-1 Filing, GrubHub referenced how, out of the $204 billion American’s spent on take out last year, $67 billion of that was spent at small businesses (the types of restaurants listed on GrubHub). Having recognized this market opportunity, GrubHub is now the leader in this new, popular, and colossal market.
GrubHub has acquired several companies since its founding in 2001. The most notable of which was completed in August of 2013, with San Francisco’s Seamless. Prior to their merger, Seamless and GrubHub were two leaders in mobile food ordering. However, their merger created a powerhouse and they are now expanding to oversees markets (such as London).
GrubHub's initial IPO success, and its recent market momentum, may prompt investors to get in on the action. And although GrubHub appears to be a good long-term investment, I remain hesitant to recommend it to investors. My reluctance to buy stock in GrubHub stems from the nature of the tech IPO market. These IPOs have been incredibly trendy as of late, and 2014 is poised to be a big year for even more tech IPOs (i.e. Dropbox, Box, Spotify, GoPro). After debuting earlier this year, both tech companies Care.com (CRCM) and Coupons.com (COUP) have decreased in value. Whereas Zoe’s Kitchen (ZOES), yet another food related company, has seen an increase in share price since its recent IPO. Hence, the tech IPO market appears to be quite saturated at the moment.
As was described with Care.com and Coupons.com, many tech companies that have recently gone public experience price corrections shortly after the initial excitement of the public offering fades. Coupons.com went public on March 10 with an initial price of roughly $30. Within two days the price had dropped to below $27, and it now sits at $19. Similar to GrubHub, Care.com surged out of the gates and saw its stock price increase by $4, from $24 to $28. However, after stagnating, Care.com’s stock price began a steady decline down to $12. This suggests that investors, at least the smart ones, temporarily turn a blind eye to IPOs as momentum carries share prices to high points. However, once the valuations of these companies are drastically overblown, wise investors cash out while others retain their shares (historically a losing proposition).
Although GrubHub is currently the market leader in food delivery apps, it will surely face new competition, given it operates in an untapped market worth over $100 billion. One such competitor will surely be the restaurant-rating service Yelp. In 2013, Yelp partnered with eat24.com in an effort to enter the mobile food delivery market. Yelp is an established tech company that already has ties to restaurants through its reviews and reservations service. According to Business Insider, Eat24 is partnered with 20,000 restaurants and is expected to quadruple its customer base in less than a year. This partnership offers Yelp a lucrative opportunity. That said, given the historical trend of recent tech IPOs and the prospect of fierce competition, you might want to cash out your shares of GrubHub, especially before Yelp enters the market.