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Pro Analysis

Morgan Stanley names GrubHub its top pick in the mid-cap internet space, predicts 18 percent rally ahead

GrubHub
Jin Lee | Bloomberg | Getty Images

Morgan Stanley on Friday upgraded GrubHub to overweight from equal weight, citing the potential for the food-delivery website to increase earnings on user growth.

"In our view, active diner growth (a sign of GRUB's ability to bring on new users) and gross food sales (GFS) per active diner (measuring GRUB's ability to grow share of stomach) remain the two most important metrics in evaluating the health of GRUB's business. We see bullish indicators in both of these, which are likely to lead to higher earnings power and upward revisions," equity analyst Brian Nowak wrote in a note to clients.

The tech analyst believes restaurant options on the website are on the rise across its top 50 markets, a trend that could significantly drive new users and increase earnings.

A limited selection of restaurants is the number one reason users leave GrubHub and the third most common reason people don't order food online, Nowak said.