One of the stock market’s biggest winners amid the novel coronavirus pandemic has been Blue Apron (NYSE:APRN). In fact, Blue Apron stock is up 60% year-to-date.
The logic is simple. Covid-19 forced restaurants to close, and made many consumers wary of going into grocery stores for fear of catching the virus. As such, consumers turned to formerly niche online food options, such as meal kits. Demand for meal kits has soared in March, April and May. As it has, Blue Apron — one of America’s leading meal kit players — has seen its stock price soar, too.
By the same token, the bear thesis seems just as simple.
Covid-19 hysteria will pass. When it does, restaurants will re-open, consumer fear of grocery stores will abate and the meal kit market will see incredibly high churn. Blue Apron’s growth narrative will, once again, fall flat. And APRN stock will tank back into penny stock territory.
But don’t subscribe to that bear thesis so fast.
It misses one major point: some new customers are going to stick. Those new customers are going to tell their friends about the benefits of meal kit delivery, prompting those households to try meal kits, and thereby kick-starting a virtuous growth cycle for Blue Apron.
As such, I wouldn’t fade this rally in APRN stock. If anything, I’d double down on it. Even if the company is just mildly successful over the next few years, the stock could roar higher by several hundred percent.
A New Growth Cycle and Blue Apron Stock
There were a lot of things wrong with Blue Apron before Covid-19 emerged. But, chief among of those shortcomings was that no one was being introduced to the meal kit space, and so the only thing driving Blue Apron’s customer growth narrative was churn.
In essence, Blue Apron spent an arm and a leg early on its life to rapidly attract customers, but, due to low gross margins, Blue Apron had to peel back on its marketing spend. This led to decreased awareness of Blue Apron and the meal-kit space in general. There were very few new customers in the pipeline. But, churn rates remained elevated (around 80%) because of the meal kit’s high prices. No new customers plus big churn equaled a rapidly eroding customer base.
Covid-19 fixed that big problem.
For the first time in a long time, there are a ton of new customers in Blue Apron’s pipeline. History says most of these new customers will churn, especially as restaurants re-open. But some will stick. Those that do stick, will tell their friends about why they like Blue Apron. Some of those friends will try it. Some will stick.
Lather. Rinse. Repeat.
It’s the start of a new growth cycle for Blue Apron. All the company needs to do to sustain this growth cycle is ensure that the number of new customers exceeds the number of churning customers.
If they can do that, APRN stock will fly higher.
A Potential Multi-Bagger?
Blue Apron stock is so cheap — the market cap is just $150 million — that even if the company is just mildly successful over the next few years, then APRN stock will turn into a multi-bagger.
Here’s the math.
There are roughly 125 million households in the U.S. According to an NPD survey, nearly 100 million Americans wanted to try meal-kit services in 2019. But for various reasons, Americans simply didn’t get around to trying them. Only 9% of U.S. households — or just over 10 million households — actually tried meal-kit services in 2019.
Covid-19 has turned that interest into action. Let’s say, conservatively, that 20% of households will try meal kits over the next few quarters to years, or about 25 million household.
Historically, churn rates for this business have been around 80%. But the industry is taking constructive steps (including centering kits around healthier options and optimizing supply chains so as to lower prices) to reduce that churn rate.
Let’s say it drops to 60%. So about 40% of those 25 million households “stick”, implying a sustainable U.S. meal-kit market that measures around 10 million households. Blue Apron, as one of the larger players in this space, will reasonably capture about 10% of that market, implying just 1 million customers.
The average revenue per customer has forever hovered around $1,000. At that unit revenue, total sales on 1 million customers will measure $1 billion. Gross margins should improve towards 40% thanks to fulfillment optimizations, while the opex rate should normalize down towards 35% against the backdrop of reduced ad spending and favorable top-line momentum.
Operating margins should be around 5%, which after making some reasonable assumptions on interest expense and taxes, could produce about $35 million in net profits.
A market-average 17-times forward multiple on that implies a near $600 million market cap for Blue Apron one day — about four-fold the current market cap.
Bottom Line on APRN Stock
The bear thesis on APRN stock is that the company won’t sustain today’s demand surge once Covid-19 hysteria fades.
That’s true. But it’s not a reason to bearish on APRN stock. Instead, if that fall-off in current demand is less than the number of new customers coming into the pipeline from word-of-mouth recommendations, then the company will keep growing its customer base, revenues and profits over the next few years.
If Blue Apron is just mildly successful in doing that, ARPN stock could turn into a multi-bagger, because the stock is so cheap today.
Big picture: the risk-reward on APRN stock looks very favorable at current levels, even against the backdrop of declining Covid-19 hysteria.
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.