Although Blue Apron (NASDAQ:APRN) had a typical IPO, Blue Apron stock didn’t.
The IPO market often struggles with over-hype issues. That is, a new and exciting company often IPOs on the public markets with a splash, and investors gobble up the shares at a premium price under the expectation that the new company is going to change the world. The company doesn’t — very few companies do — and as reality sets in over the subsequent several months, the red-hot IPO stock goes ice cold.
In 2019, see alternative meat maker Beyond Meat (NASDAQ:BYND), enterprise video tech company Zoom Video (NASDAQ:ZM), fashion e-retailer Revolve (NYSE:RVLV), and many, many more. That’s the typical IPO pop-and-drop pattern. But, meal-kit maker Blue Apron has been a loser in the public markets ever since its June 2017 IPO and with good reason.
Since day 1, Blue Apron has had a big fundamental problem. That problem? The company can’t grow without spending an arm and a leg. When growth at Blue Apron was big, as it was like it was back in 2016/17, operating expenses were huge, and profitability was a long shot. But, as soon as Blue Apron started pulling back on things like marketing spend in 2018/19, growth went out the window, and the loss of growth made profitability just as much of a long shot as it was when expenses were huge.
The implication? It’ll be tough for Blue Apron to ever get into the black on the bottom of the income statement. So long as this company keeps printing red, APRN stock will remain weak.
Blue Apron Has Problems
There are a few fundamental problems with Blue Apron, the sum of which will likely keep APRN stock depressed.
First, the meal kit market is niche. While some thought that meal kits were the way of the future, it turns out that most consumers like to do their own grocery shopping and cooking. Meal kits are generally just too expensive, with too-small portions, and are too much of a hassle to manage on a week-by-week basis. As such, despite being around for several years, meal kits are used by only 7% of the American population, according to a recent Family Food Fix survey.
Second, within that already niche meal-kit market, the competitive landscape is ruthless. There are multiple players in the space — Home Chef, Green Chef, and HelloFresh, to name a few — and none of them have any product advantages over the other since they all largely have similar food offerings.
At the same time, there are no network effects here, so size doesn’t comprise a moat. Grocery store operators, like Kroger (NYSE:KR) and Amazon (NASDAQ:AMZN), can also easily pivot into the space.
Third, because of the ruthless competitive landscape, the only way Blue Apron can differentiate itself is through more marketing. That’s why this company grows when marketing spend goes up, and shrinks when marketing spend goes down.
Fourth, profitability is a long shot. At present, the company runs huge losses. In order to strike a profit, Blue Apron needs to either cut expenses on a stable revenue base, or grow revenues on a stable expense base.
But, Blue Apron hasn’t proven that they can do either.
Blue Apron Stock Will Remain Weak
Because Blue Apron hasn’t proven that it can either grow without running up expenses or cut expenses without killing revenues, Blue Apron stock will likely remain week.
Here’s the math. At present, Blue Apron is a ~$450 million revenue company with about 35-40% gross margins. That gives the company a gross profit run rate of about $170 million.
Operating expenses in each of the past three years have run north of $300 million. Thus, in order to net a profit, Blue Apron either needs to more than double its gross profit through huge revenue growth without upping expenses, or cut its operating expenses by more than half without losing revenues.
Possible? Yes. Likely? No. The competitive landscape in this market means that meal kit companies are built on the back of marketing spend, and little else. Thus, this combination of growth without marketing spend, or stabilization with falling expenses doesn’t add up.
Just look at the recent numbers. Year-to-date, Blue Apron’s operating expenses are down almost 40% year-over-year. But, the customer base has also shrunk by 30% or more in each quarter this year, including a 40% drop last quarter. Revenues are down more than 30% year-to-date.
Until those trends reverse course and Blue Apron proves it can grow without spending an arm and a leg, APRN stock won’t rebound in a meaningful and sustainable way.
Bottom Line on Blue Apron Stock
Continue to avoid APRN stock. Shares have been weak for a long time because of one big fundamental problem — Blue Apron can’t grow without spending an arm and a leg. This problem remains true today. So long as it does remain true, APRN stock will remain weak.
As of this writing, Luke Lango was long BYND and KR.
