Some IPOs have done well this year. Others not so much. Among the latter, the poster-child for botched 2017 tech IPOs is online meal-kit company Blue Apron Holdings Inc (NYSE:APRN).
APRN stock went public in June at $10 per share. That is about as high as APRN stock has ever been.
Two earnings reports and a bunch of selling later, APRN stock hovers around $3. But don’t let the $3 price tag fool you. APRN stock is far from a bargain buy here. Here’s why.
Does Blue Apron Have A Future?
At the core of the problem, investors are starting to question whether or not APRN will be around in five-plus years.
The meal-kit company is getting killed by bigger competition. Much like Fitbit Inc (NYSE:FIT) did in the wearables space, APRN proved out value in the secular growth meal kit space. But once there was proof of value in the market, bigger players stepped in and ate APRN’s lunch.
The main culprit here is Amazon.com, Inc. (NASDAQ:AMZN). Amazon has debuted its own line of fresh meal kits which bear a strong resemblance to Blue Apron’s kits. The problem here for Blue Apron is that Amazon is much bigger and has far more resources and reach than APRN. Squeezing APRN out of the meal kit game, then, seems like something Amazon could do quite easily.
But it’s more than just Amazon. There are a handful of other start-ups in the market which are making meal kits a crowded space. Look at Hellofresh SE (ETR:HFG), Home Chef, or Tastefully Simple as examples. Plus, grocery stores are starting to package their own meal kits, and that could really be the end-game in this whole market.
So does APRN really have a future? Yes, but not a bright one. Revenue growth slipped to a measly 3% last quarter. Customers are actually down year-over-year. Overall, this isn’t anything more than a mid single-digit revenue growth story.
Will Blue Apron Ever Be Profitable?
Just looking at the numbers, it’s tough to see how APRN will ever earn a profit.
Gross margins, at their peak, were just above 30%. Those are coming down in a big way this year (22% last quarter) due to higher infrastructure costs (necessary to support expansion) and absorbing higher food costs (necessary to satisfy customers). Because a big part of these inputs costs are necessary to support the business, there is no guarantee that gross margins get back to 30%.
Even if we do aggressively assume gross margins can bounce back to 30% (which is unlikely), it’s still hard to see APRN getting the level of expense leverage necessary to drive profitability if revenue growth is stuck in the mid single-digit range.
The marketing expense rate is down big, but it’s still about 15%. Mid single-digit revenue growth won’t allow for much more marketing expense leverage. At best, the marketing expense rate falls to 10%.
Other expenses are running at around 30% of revenues so far this year. That is up big from last year (roughly 20%) due to increased personnel costs and increased facilities costs. But even if that expense rate falls back to 20%, the total operating expense rate is still 30%, which implies break-even on the operating profit line.
In a best-best case scenario, APRN’s operating profit margin is in the low-single digit range (around 2-3%). If revenues grow at a 5% compounded annual growth rate over the next 5 years, then revenues will be narrowly over $1 billion in 5 years. A 2.5% operating profit margin implies operating profits of $25 million. Slap a 35% tax rate on that, and you get to net profits of about $16 million.
APRN’s current market cap is about $587 million.
That means APRN stock is currently trading at more than 35x what I see as best-case scenario earnings in five years.
That’s nonsense.
Bottom Line on APRN Stock
Don’t let the $3 price tag fool you. This is still an expensive stock with a bleak growth outlook.
I’m avoiding it until the pathway to profitability becomes more clear and/or revenue growth comes back in a big way without margins being compromised.
As of this writing, Luke Lango did not own any of the aforementioned stocks.
