The stock of meal-kit maker Blue Apron (NYSE:APRN) went public in mid-2017 at an IPO price of $10. Right from the onset, investors sniffed out that this company had competition and profitability problems.
The stock consequently never traded above its IPO price. Ever since, disappointing quarter after disappointing quarter has confirmed those early fears, and APRN stock now trades hands just above $1, with the threat of bankruptcy lingering around the corner.
A number of events in early 2019 gave investors hope that APRN stock was in the beginning stages of a massive turnaround. Specifically, Blue Apron announced a big meal-kit partnership with Weight Watchers (NYSE:WTW), gave a positive update on its fourth-quarter trends, and reaffirmed its guidance for positive EBITDA in fiscal 2019. APRN stock consequently tripled over the course of a month.
That turnaround rally was ultimately stymied by bigger picture and longer-term concerns related to revenue stability and profitability.
The “false turnaround” of APRN stock in early 2019 shows that Blue Apron stock won’t meaningfully rebound until APRN’s fundamentals start to materially improve. That means investors should not buy APRN stock until they see customer stabilization, alongside revenue stabilization. They will also need to see APRN’s gross margins expand to and hold the 40% level, and the company’s operating losses must narrow significantly.
If all of those conditions are met, APRN stock could rally towards $1.50 or higher in 2019.
What Blue Apron Needs for a Turnaround
Over the past several quarters and years, as the meal-kit space has become more crowded than ever before, APRN has lost customers, its revenues have dropped, its margins have been adversely impacted, and its narrow losses have turned into wide losses.
There’s reason to believe these trends will continue. Its competition is only ramping. Plus, the meal-kit space is turning out to be a lot smaller than most had anticipated, so Blue Apron is presumably losing share in a market that may already be tapped out.
APRN can’t really afford to cut its operating spending by very much, since doing so in the past has caused its customer base to decline by large amounts. Consequently, the reality is that Blue Apron is stuck between a rock and a hard place, so Blue Apron stock probably won’t stage a big turnaround anytime soon.
But there’s a chance that APRN will pull a rabbit out of its hat.
For starters, APRN has a new CEO, Linda Findley Kozlowski, who knows a thing or two about turnarounds. Before coming to APRN, she was the COO of Etsy (NASDAQ:ETSY). When she became COO in May 2016, ETSY stock was in the midst of a downward spiral from $30 to $8. By the time she left in late 2018, ETSY stock had skyrocketed to $50. The combination of Kozlowski’s arrival and the big deal with WTW could be exactly what the company needs to stabilize its customer base without increasing its marketing spending.
Furthermore, the company has a new fulfillment center that is fully operational and has significantly higher margins than the company’s older fulfillment center. Thus,in 2019, its gross margins could rise towards 40% and could potentially exceed 40%. Along with that margin improvement, revenue stabilization, stable marketing spending and lower general and administrative expenses would lead to healthy operating-spending leverage.
All in all, there is an opportunity for APRN to stabilize its customer and revenue base in 2019, while concurrently improving its gross margins and driving down its operating-spending rate. If the company does check off all those boxes, APRN stock will rally tremendously.
APRN Stock Has Room to Run
APRN stock is so beaten up today that if the company meets the criteria I set above, Blue Apron stock can jump 50% this year.
The math is pretty easy to understand. Blue Apron’s customer base has been consistently dropping for several quarters. But, given the WTW deal and its new CEO, it’s reasonable to assume that its customer base will not drop much below 500,000 Those customers will develop some sense of loyalty to Blue Apron, so it will be able to continue to spend less on marketing. Meanwhile, its gross margins should continue to improve, thanks to its new fulfillment center.
If all that happens over the next several years, I think APRN could squeeze out a narrow profit by fiscal 2023, and will generate earnings per share of about 15 cents by fiscal 2025. Based on a forward price-earnings multiple of 16, which is average for the market, that implies a fiscal 2024 price target for APRN stock of $2.40. Discounted back by 10% per year, that equates to a fiscal 2019 price target of $1.50 for Blue Apron stock.
Thus, in the event that Blue Apron does turn itself around, APRN stock can jump 50% in 2019.
The Bottom Line on APRN Stock
The chances of Blue Apron carrying out a big turnaround in 2019 are low. But APRN could rise tremendously if APRN does turn itself around.
So the only way to look at APRN today is as a high-risk, high-reward trade. Only investors with a big appetite for risk should be dabbling in those waters.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.