For the first time in several years, struggling meal-kit maker Blue Apron (NYSE:APRN) reported positive revenue growth in its second quarter earnings report, as the Covid-19 pandemic pushed consumers to adopt contactless food options, like meal-kit delivery services. The numbers broadly confirmed what has been a strong rally in APRN stock amid the pandemic. Year-to-date, Blue Apron stock is up more than 80%.
More importantly, the numbers and underlying trends imply that Blue Apron is the top of the first inning of a multi-year growth inflection, wherein the meal-kit maker sustains healthy customer, revenue and margin growth over the next several years.
If Blue Apron can do that, APRN stock is so cheap today that you could see the stock surge higher, by as much as 200% over the next few years.
So, if you’re looking for an explosive small-cap stock to play changing consumer habits as a result of Covid-19, APRN stock is a solid pick.
Here’s a deeper look.
Strong Earnings and APRN Stock
Blue Apron’s second-quarter earnings were strong and corroborated the idea that Covid-19 has provided a meaningful boost to the meal-kit delivery space.
Blue Apron added 20,000 customers in the quarter, up 5% quarter-over-quarter. The platform has now added 45,000 customers in 2020, a sharp reversal from the steady and huge customer declines Blue Apron was reporting throughout 2017, 2018 and 2019.
Engagement from those customers was up across the board. Orders per customer rose 17% year-over-year. Average order value rose more than 5%, and average revenue per user (ARPU) was up 25%.
All of this growth helped push Blue Apron to report 10% revenue growth in the quarter — it’s first positive revenue growth quarter since 2017.
Better yet, management expects this growth trajectory to only get better. They are guiding for revenues to rise 13% year-over-year in the third quarter, supported by the fact this new round of customers appears to be far stickier than previous customers (among customers surveyed who ordered Premium meals, 88% said they intended to make a repeat purchase with Blue Apron).
And, even better yet, gross margins rose 60 basis points in the quarter on the back of price improvements and more cost-effective fulfillment packaging. Marketing dollars remained constrained. Other opex dollars continued to fall.
In short order, then, Blue Apron’s print checked off all the boxes. Strong customer growth. Robust engagement. Improved stickiness. Accelerating revenue growth. Rising margins. Strict cost control.
It was a good quarter from a historically bad company.
A Multi-Year Turnaround
I believe that this is the beginning of a multi-year turnaround in Blue Apron’s growth narrative.
To be clear, I don’t think meal-kits will ever reach ubiquity. They are too expensive, take too much time to prepare and have too much competition to be universally and broadly adopted.
But I do think there is a niche out there in which meal kits can thrive. Persons who don’t like to eat out. Who like to eat healthy, like to cook, have the time to cook and aren’t driven entirely by price. Persons who like schedules, regimens and consistency.
There’s a market for meal kits.
Because of Covid-19, that market is being introduced to meal kits without Blue Apron needing to aggressively up marketing spend, so margins (and cash) are being preserved. Equally important, the right people are now trying meal kits, and they are sticking, as opposed to the first wave of customers back in 2017 that churned quickly.
As such, I think Blue Apron can sustain healthy albeit slow customer growth over the next several years, breed deep loyalty among that small customer base and drive sustainable revenue growth against the backdrop of constrained expenses and rising gross margins.
That’s a recipe for success for APRN stock.
Blue Apron Stock is Cheap
Blue Apron stock is dirt cheap. Like 0.3-times this year’s sales estimates cheap.
All it takes, then, is a little bit of growth to spark huge gains in APRN stock.
I think that’s exactly what will happen.
According to my modeling — assuming Blue Apron can sustain mild customer growth in the 10,000-new-customers-per-quarter range and increase ARPU among that small base, while stabilizing gross margins around 40% and keeping the annual opex base around $200 to $250 million — then I see Blue Apron’s earnings per share rising towards $2 by 2025.
Based on a market-average 17-times forward earnings multiple, that implies a potential 2024 price target for APRN stock of $34.
That’s almost triple today’s APRN stock price.
Bottom Line on APRN Stock
Blue Apron stock isn’t what I would consider a long-term winner.
But it is what I would consider a misunderstood and undervalued asset, which has huge upside potential over the next few years if just a few things go right.
It increasingly looks like a few things will go right for this company. If so, then APRN stock is due for big gains.
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 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.