Shares of GrubHub Inc. (GRUB) have soared more than 20% since the company reached a deal with Yelp Inc. (YELP) to acquire Eat24 and enter into a five-year partnership. The $287.5 million cash acquisition consolidates GrubHub's leadership position following its purchase of Foodler and OrderUp earlier this year. The agreement with Yelp also comes shortly after a high-profile partnership with Groupon, Inc. (GRPN) in late July for delivery service.
Morgan Stanley's Brian Nowak upgraded GrubHub stock to Overweight with a $59.00 price target on Monday, saying that the larger revenue base gives the company more earnings power. In addition to higher EBITDA, the analyst believes that the growing scale could lead the EV/EBITDA multiple to expand to a level higher than 17x, which could imply a valuation of $66.00 per share. Both of these price targets represent significant premiums to the current price. (See also: Groupon, GrubHub Shares Climb on Partnership.)
From a technical standpoint, the stock broke out from an ascending triangle pattern and R1 resistance at $48.72, past R2 resistance at $51.31, to all-time highs. GrubHub's previous highs were made in April 2015 before a flurry of competitive pressure sent the stock sharply lower during the second half of the year. Since bottoming in early 2016, the stock has rebounded to new all-time highs as the company consolidates its leadership position.
Traders should watch for some consolidation above the $55.00 levels that represent the breakout target for the ascending triangle. With the relative strength index (RSI) at a lofty 84.55, the stock is likely to see consolidation before a move higher. The upshot is that the moving average convergence divergence (MACD) has regained lost momentum, which could signal the start of a medium- to long-term bullish trend. (For more, see: GrubHub Is Next to Be 'Amazoned': Morgan Stanley.)
Chart courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.