Up until recently, meal-kit maker Blue Apron (NYSE:APRN) was best known on Wall Street for being one of the worst investments in financial history. Blue Apron stock went public in June 2017 at a split-adjusted price tag of $150. About two and a half years later, it found itself languishing around $2 in late February 2020, down a jaw-dropping 99% from its IPO price.
Then the novel coronavirus pandemic struck the U.S. Everything changed for Blue Apron.
The stock soared from $2 in late February 2020, to nearly $30 in late March, as the pandemic forced consumers to stay at home, avoid closed restaurants and busy grocery stores, and adopt meal-kit services like Blue Apron. Indeed, on the day Blue Apron stock touched $30, its management announced that their service had seen a “sharp increase in consumer demand” over the previous week.
Is this rally legit? Can the coronavirus really be the lifeboat that saves Blue Apron from obliteration, and turns its stock into a winning investment? It could.
- Pandemics are short-term in nature, but consumers adopt long-term changes in behavior during them. The SARS epidemic in 2002, which lasted only a few months, helped give birth to a booming Chinese e-commerce market. Similarly, the coronavirus outbreak in 2020, which will likely last only a few months, will provide a multi-year boost for the meal-kit delivery market.
- Blue Apron has unequivocally seen a huge uptick in demand recently. According to multiple outlets, consumer interest in and demand for Blue Apron’s services has boomed over the past few weeks.
- Blue Apron will likely retain a significant portion of this demand surge. Contrary to consensus belief, it appears that Blue Apron is well positioned to turn a portion of this near-term demand surge, into long-term customers.
- Even conservative estimates yield huge potential upside for the stock. Because Blue Apron stock is so cheap, all the company needs to do is be marginally successful with converting today’s huge demand surge into long-term customers in order for the stock to explode higher.
Long-Term Changes from Short-Term Pandemics
Health outbreaks and crises never last that long. In modern history, epidemics and pandemics tend to last only a few months to a few years, at most. But, oftentimes, these short-term pandemics cause long-term changes in consumer behavior.
For example, take the world’s previous coronavirus outbreak: SARS in 2002/03. Many industry insiders and analysts attribute the birth of Chinese e-commerce to the SARS epidemic, since it forced retailers to adopt online selling channels amid physical store closures.
I see a similar online selling revolution taking hold in the aftermath of the Covid-19 outbreak. Specifically, amid widespread restaurant closures and pervasive fear that going into a grocery store is “risky,” many consumers are opting for online grocery and meal-kit services for the first time ever.
In this sense, the coronavirus pandemic has the power to turn meal-kit services from niche, to mainstream, just as SARS turned Chinese e-commerce from niche, to mainstream.
Huge Demand Surge
There’s no questioning that Blue Apron has seen a huge surge in consumer demand over the past few weeks.
Clearly, Blue Apron is seeing an uptick in consumer demand like never before.
Some New Customers Will Stick
Many investors believe that Blue Apron’s customer surge is a one-time thing.
That is, they believe that all of these new customers signing up for Blue Apron today, will ditch the service as soon as the virus passes, restaurants open back up and grocery stores become less “risky.”
Sure. Some customers will. But a lot won’t. Prior to the coronavirus pandemic, consumer interest in meal-kit services was high. According to an NPD survey, nearly 100 million Americans wanted to try meal-kit services in 2019.
Considering pre-coronavirus interest in Blue Apron services was that high before, I find it hard to believe that everyone who is signing up for Blue Apron today is going to churn over the summer once restaurants open back up. Instead, I think that the pandemic has turned consumer interest, into consumer demand and that a healthy portion of this demand will stick around because the customers enjoy the service.
Small ‘Stick Rate’ Can Still Lead to Huge Gains
The real bull thesis on Blue Apron stock centers on one thing: It’s dirt cheap and doesn’t need much in order to explode higher.
That is, Blue Apron doesn’t need a huge “stick rate” in order for the stock to work. Instead, the company just needs to turn a small sliver of this huge demand surge into long-term paying customers in order for the stock to rocket towards $20 or $30.
Just look at the numbers.
Blue Apron exited 2019 with 454,000 customers. That number was at nearly 900,000 in 2017. Let’s say that this coronavirus pandemic paves a path for Blue Apron to grow to around 1 million customers by 2025, or simply back to where the company was roughly in 2017. Let’s also say that gross margins stabilize amid production footprint consolidation, and that the company doesn’t have to rely on aggressive marketing to on-board customers anymore (customer growth is fueled today out of necessity), leading to meager 5% operating margins by 2025.
Those are fairly conservative assumptions.
Under those conservative assumptions, I see Blue Apron doing about $3 in earnings per share by 2025. Based on a 16-times forward exit multiple and a 10% annual discount rate, that implies a potential 2020 price target for the stock of over $30.
Bottom Line on Blue Apron Stock
Blue Apron is a high-risk, high-reward stock here and now.
The high-risk part, of course, is that today’s demand surge does not last, the company continues on its customer and money losing ways, and the stock ultimately heads to zero.
The high-reward part, meanwhile, is that the company turns some portion of today’s demand surge into long-term customers, the company reverses its customer and money losing ways, and the stock powers to $30.
Right now, I think the bull thesis looks slightly more compelling than the bear thesis. As such, I’m cautiously optimistic about Blue Apron at current levels.
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 one of the world’s top stock pickers 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 hold a position in any of the aforementioned securities.