While U.S. equities overall are holding in stasis, investors are dumping some of the riskiest areas of the market. I’m talking about recent initial public offerings, which have been classic late-cycle sentiment-based plays without solid fundamentals and with terrible participation terms.
Just look at Blue Apron Holdings Inc (NASDAQ:APRN), the meal kit provider that fell more than 40% from its post-IPO high on Monday on reports Amazon.com, Inc. (NASDAQ:AMZN) is actively considering getting into the space in the wake of its proposed purchase of Whole Foods Market, Inc. (NASDAQ:WFM).
While APRN is the dominant player in its fast-growing industry, the company is mired with problems. Its economic moat is basically non-existent, with literally hundreds of competitors, high customer acquisition costs and a lack of profitability.
Expense cutting isn’t an easy option, with cost of goods sold dependent on food and shipping costs. And raising prices would only worsen the new subscriber churn rate.
The bulls, for now, continue to focus on rapid revenue growth and a relatively modest price-sales multiple. But with no clear path to profitability, it’s a message that’s not resonating.
Click to Enlarge The increased focus on fundamentals could spell trouble for recent IPO Snap Inc (NYSE:SNAP), which is already down nearly 50% from its post-IPO high.
Watch for a breakdown from its multi-week holding pattern just above the $15-a-share level as investors lose faith in the “camera company” and its ability to move from an infamous “sexting” app into a maker of consumer electronics.
Amid the muddled strategy, investors accepted a lack of shareholder voting rights and ridiculous post-IPO lockup terms.
SNAP was downgraded by analysts at Cowen last week ahead of the company’s next earnings report on Aug. 10.
Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
