The IPO market has definitely gotten back into gear. This is especially the case for tech deals. Just look at the recent offerings from companies like Docusign Inc (NASDAQ:DOCU), Zscaler Inc (NASDAQ:ZS) and Avalara Inc (NYSE:AVLR).
But it’s important to keep in mind that IPOs have a darker side. In fact, some of them can be downright nightmarish! An example is the meal-kit delivery service, Blue Apron Holdings Inc (NYSE:APRN). Since its market debut, the return on the shares has been a miserable -63%.
Although, lately, there have been some signs of strength. Note that APRN stock has gone from an all-time low of $1.72 to $3.65.
Part of this has been a relief rally. But APRN stock has also seen some good news. Back in May, the company hired Tim Bensley as the new CFO. Prior to this, he was an executive at PepsiCo, Inc. (NYSE:PEP).
APRN was also able to put together a pilot program to sell meal kits in some Costco Wholesale Corporation (NASDAQ:COST) locations, which should help gain new members.
And, yes, APRN stock is fetching a fairly low valuation. The shares currently trade at about 0.9 times revenues.
Tough Issues With APRN Stock
Yet none of positive factors are really enough to make APRN a buy. If anything, the company still faces enormous challenges.
Perhaps the biggest is that the company has a non-existent moat and little differentiation. This is evident with the large number of tough competitors. Some include Amazon.com, Inc. (NASDAQ:AMZN), Walmart Inc (NYSE:WMT), Weight Watchers International, Inc. (NYSE:WTW), HelloFresh, Kroger Co (NYSE:KR) and Albertsons.
Even worse, it is far from clear that mainstream consumers really want a meal-kit subscription. Interestingly enough, a more interesting option — for those who have busy schedules — is to use a meal delivery service like GrubHub Inc (NYSE:GRUB), UberEats and DoorDash.
Unfortunately, all these adverse industry dynamics have taken a toll on APRN’s financials. During the latest quarter, revenues plunged by 20% to $196.7 million. A big part of this was due to the deceleration of the marketing expenditures.
In fact, there has continued to be significant churn — which is a killer for a subscription business. For the quarter, there was a 24% year-over-year fall in the customer base.
And despite the cost cutting, APRN continues to lose money, with a $17.2 million loss in EBITDA for the quarter. Oh, and the company only has $203 million in the bank.
Bottom Line on APRN Stock
The market opportunity for APRN is certainly large. According to a Euromonitor study, the online sales for groceries in the US came to $9.7 billion in 2016 and they are expected to grow at an 8.5% compound annual rate through 2020. By comparison, the growth for the traditional grocery market is expected to be 1.3%. In other words, this category is likely to see continued changes in habits and consumer preferences.
But, again, this opportunity has already attracted plenty of competition — and many of these players have more resources than APRN. What’s more, there is a threat that the company will ultimately become marginalized. This has been the case with other former internet darlings like Groupon Inc (NASDAQ:GRPN). It can be extremely difficult to revive a damaged brand.
Granted, the end-game for APRN stock could be a buyout (one of the rumors is that Costco could be a suitor). But even if there is a deal, there may not be much of a premium because of the issues with the company.
In other words, the best approach is probably to avoid APRN stock for now.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.