The novel coronavirus outbreak — formally dubbed COVID-19 — has been bad for pretty much every business in the world. After all, the virus is keeping billions of consumers across the globe holed up at home, and has brought the global economy to a screeching halt besides. Against that backdrop, the 30% plunge in stocks since mid-February makes complete sense.
Then there’s food delivery stocks.
Food delivery stocks have bucked the broader market trend in a big way over the past month. Rather than collapsing like pretty much every other stock out there, food delivery stocks have rallied. Just look at these three food delivery stocks which have exploded higher in 2020 amid the coronavirus panic:
The broad bull thesis on the food delivery segment is pretty simple. Consumers are stuck at home, restaurants are closed, but consumers still have to eat. So, they will increasingly turn towards food delivery services during this exceptionally unique time.
Simple enough, right? Also hard to argue against. Top executives at many of these food delivery companies have said that demand for their services has skyrocketed over the past few weeks.
But how long will this tailwind last? And are these red-hot food delivery stocks worth chasing?
Let’s take a deeper look at the three food delivery stocks that are winning while the rest of the market is losing.
Red-Hot Food Delivery Stocks: Blue Apron (APRN)
Year-to-date gain: 120%
First up, we have struggling meal kit maker Blue Apron.
Blue Apron went public on Wall Street in June 2017. The stock has since lost 98% of its value amid customer losses, revenue declines and widening losses.
But, the coronavirus outbreak has breathed life back into this beaten-up company.
Year-to-date, APRN stock is up 120% on hopes that social distancing in the U.S. will spark increased consumer demand for Blue Apron’s meal kits, and that this increased demand will save the company from bankruptcy (there’s not a lot of cash left on the balance sheet).
I think these hopes are overly optimistic.
Yes, there will be a demand boost. Management has confirmed as much. But, because this is a super competitive market with tons of players (HelloFresh, Home Chef, Plated and AmazonFresh, to name a few), that demand boost won’t be that big. Data from Google Trends shows that while Blue Apron is seeing a spike in search interest, it’s a tiny spike both in the big picture and relative to what competing brands are seeing.
Perhaps more importantly, this demand boost won’t last that long. Consumers like to shop at grocery stores. That’s why this space never exploded in the first place, and why APRN stock lost 98% of its value from its IPO. As soon as the virus clears up, consumers will go back to their regular grocery shopping habits, and Blue Apron will go back to losing customers.
Overall, recent strength in APRN stock is built on growth assumptions that will prove to be overly optimistic.
Year-to-date gain: 750%
Up a jaw-dropping 750% in 2020, food delivery platform Waitr is the not just the hottest food delivery stock out there, but also one of the hottest stocks in the entire market.
The thesis is simple. Consumers can’t go to restaurants anymore. And not all consumers can or want to cook, so there should be a surge in demand for food delivery services like Waitr, Uber Eats, Postmates, Doordash, etc during the coronavirus outbreak.
The problem with this thesis, though, is equally simple. Most of those consumers aren’t going to turn to Waitr.
Take a look at the market share numbers for the food delivery market. This is an industry dominated by Uber Eats, Postmates, Doordash and GrubHub (NYSE:GRUB). Collectively, those four platforms own 98% of the U.S. food delivery market. Waitr, meanwhile, is part of a group of second-tier players fighting for 2% of the market.
To make matters worse, even if Waitr does see a surge in customers, the company operates at a dismal 23% gross margin, with just $29 million in cash on the balance sheet, against over $130 million in debt. That’s a tough financial profile to operate against.
Broadly, it means that in order to avoid insolvency, Waitr needs to acquire a ton of new customers without running up marketing dollars, since a 23% gross margin isn’t big enough to afford a big opex base.That’s a tall order, and I’m not sure Waitr can do it, even with coronavirus tailwinds, in a market so intensely competitive.
Year-to-date gain: 20%
Last, but certainly not least, on this list of red-hot food delivery stocks is HelloFresh.
Much like Blue Apron, HelloFresh is a meal kit maker. Unlike Blue Apron, however, HelloFresh is a big and growing player in this market. While Blue Apron has seen its market share in the U.S. meal kit market drop from over 30% in 2016 to barely over 11% in 2019, HelloFresh has seen its share grow from 12% to 26% over that same time frame.
Why this big divergence in performance? Speed, simplicity and convenience. Compared to Blue Apron’s meals, HelloFresh’s meals are easier to make, take less time and require less labor and ingredients.
This winning strategy will enable HelloFresh to continue to dominate the meal kit category for several years to come. The company is also already profitable on an adjusted earnings before interest, taxes, depreciation and amortization basis, and will only get more profitable with increased scale from the coronavirus pandemic.
Net net, if you’re looking for a pure grocery delivery play at this time, skip Blue Apron and look at HelloFresh. The latter is simply much bigger, much better and much more profitable.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not own a position in any of the aforementioned securities.