Oct 13, 2015 ยท 5 minutes

Economists like to say that a rising tide lifts all boats, and the past several years in private tech financing offer a clear case of that principle in action.

But now that the tide is turning and many investors are bracing for a storm ahead, there is a lot of discussion about which companies will prove seaworthy enough to stay afloat.

Fairly or not, much of the conversation is focusing on companies that have gone public in the past few years, largely because they are required to disclose more data on their financial health than private companies. That leads to a lot of extrapolation onto private companies, especially in industries overstuffed with me-too startups chasing a similar business model.

Among the more crowded markets is that of food-delivery. Dozens of startups have raised venture money in the past few years, with some, like Postmates, Munchery and Blue Apron, raising more than $100 million. That's not to mention experimental initiatives from giants like Amazon, Uber and Google.

And then there's GrubHub, the 11-year-old restaurant delivery company that went public in April 2014. GrubHub also owns brands like Seamless, AllMenus and DiningIn. The stock, currently trading at 16 percent above its offering price, has become something of a publicly traded proxy for the on-demand, food-delivery industry. Which is one reason why the debate among analysts and investors about its fate is worth following.

Much like Fitbit, the strongest tech offering so far in this anemic year for IPOs, GrubHub has a lot of the earmarks that fundamental investors like. Revenue in the first half of the year grew 49 percent to $176 million. Net income nearly tripled to $20 million in the period, raising GrubHub's profit margin to 11 percent from 6 percent a year earlier.

GrubHub has met or exceeded Wall Street's revenue estimates for all six quarters since it went public, and it's beaten profit estimates for five of those six quarters. GrubHub may not be the biggest or best-known consumer-tech brand over the past few years, but it's performed better than many better-known peers, like Twitter.

In April, GrubHub rose as high as $47.95 a share, or 84 percent above its $26 a share offering price. At that peak, the company was valued at more than $4 billion. After GrubHub said it would increase spending to expand its delivery capabilities, the stock lurched down – and continued downward for months, until it bottomed out at $23.53 a share two weeks ago, stripping $1.5 billion from its April market value.

The reason for the decline had a lot to do with the exact same question private investors are beginning to ask of the tech sector: Who will and won't survive a downturn? A growing sentiment emerged that GrubHub might not. The company faced too many new competitors with ample cash reserves – whether from venture rounds or deep corporate coffers – that could be used to lure away fickle customers.

In July, CB Insights reckoned that startups in the food and grocery delivery business raised nearly a half a billion dollars in 109 global deals. Around that time, Uber expanded and promoted its UberEATS delivery service, and Amazon began experimenting with its own service last month. Cowen & Co. surveyed users in GrubHub's and Seamless's core markets and was “surprised by the level of competitive inroads” rivals were making.

Another firm predicted that these factors would cause GrubHub to miss its estimates in the July quarter. That didn't happen. Revenue and net income were both well above expectations, but there were also signs that the growth rate in orders were slowing to around 25 percent this year from about 33 percent last year, while spending on delivery operations would increase by about 10 percent.

Barclays analyst Christopher Merwin summarized the concerns in a report that noted a growing divide between the strong and the weak in Silicon Valley, with GrubHub looking more like it belonged with the weak.

“We have noticed that there is an increasing divergence between the haves and the have nots in Internet. Large platform companies with numerous business segments are still benefiting from structural traffic growth in emerging markets and seem mostly immune to increasing competition from well-funded private market entrants.

“For some small- and mid-cap companies, however, domestic sites are facing audience saturation while also getting pressure from private competitors. As a result, margins are falling and earnings quality is deteriorating as higher levels of stock-based comp are required to attract and retain talent in a highly liquid job market in Silicon Valley.”

That distinction between the haves and the have nots is definitely on the minds of many people these days. Merwin cut his rating on GrubHub's stock as well as his price target, citing concerns about the company's ability to scale in the face of well-funded competition.

Last week, though, Dean Prissman of Morgan Stanley issued a contrarian “deep dive,” a 29-page report that rebutted many of the bearish arguments. In particular, Prissman took aim at “the current narrative around competition for GrubHub, which is bearishly lopsided.”

From a customer standpoint, GrubHub is much cheaper than most rivals because it doesn't charge them service fees or delivery charges, but takes a 14-percent commission of restaurant orders. While GrubHub adds a 15-percent tip, Prissman noted, “key private competitors Postmates and DoorDash rely on high consumer fees, making food 45 percent to 75 percent more expensive, likely limiting broad appeal and capping risk to GrubHub.”

The report also noted that while Postmates has its passionate and loyal users, the ratings for GrubHub are generally positive (the 22,800 ratings in Apple's App Store rate it four and a half stars), and that the company's early entry and scale will allow it to invest sustainably in expanding delivery.

Amazon's entry, meanwhile, seems tentative and may not mesh with its focus on warehouse-based fulfillment, while UberEATS could remain a niche player service or a logistics service for many companies like GrubHub. (Not to mention the blow Stephen Colbert delivered to UberEATS's image by openly mocking it on national television.)

The debate over GrubHub's fate in a downturn will likely continue in coming quarters. When a downturn arrives, the company may benefit from its focus on keeping delivery costs low. And it may also become to food delivery what Pandora has become to streaming-music delivery: an early entrant that keeps holding its head above water even as Spotify, Apple, Google and others go after its customers.

Either way, it's much easier to make an educated guess about GrubHub's future, or Fitbit's, because they're public. In tougher times, investors will want to take a closer look at the fine print of financial reports. That will be harder for investors in private companies, as will the task of figuring out which private companies will sink, and which will swim.