The meal-kit delivery service originally targeted a range of $15 to $17 in its IPO. It had to price APRN stock at $10, however. The IPO price held the first day, no doubt with the help of underwriters Morgan Stanley (NYSE:MS), Barclays PLC (ADR) (NYSE:BCS) and Citigroup Inc (NYSE:C). But APRN has lost almost 25% in the last two weeks — even after a nearly 6% gain Wednesday.
It’s not hard to see why. Blue Apron has leadership in the meal-kit market — for now. But it’s massively unprofitable, and its business model at the moment is to (as the old saw goes) “sell at a loss and make it up on volume.”
Essentially, Blue Apron has to continue to cut costs to improve gross margins, pull back on marketing spending, and continue torrid revenue growth. It’s a big ask – probably too big for APRN stock.
Blue Apron Revenue Is Growing (At Least)
In terms of the positives facing APRN stock, the revenue growth is the most obvious. To be fair, it’s truly impressive. According to the Blue Apron S-1, revenue was $77.8 million in 2014. Two years later, it was more than ten times as much, at nearly $800 million. The growth rate slowed to a still-impressive 42% in the first quarter of 2017.
The bull case for APRN stock is based on that growth continuing, and on the idea that Blue Apron has a truly impressive market opportunity. In the S-1, Blue Apron itself cited projections that online grocery sales would grow at an 8.5% clip over the next four years (including 2017). Blue Apron’s “natural focus” and ease of use (ready-to-cook meals at your door) would seem to position the company to take share both from grocers and from restaurants.
And 900% growth in two years — and $800 million in revenue within five years of the company’s founding — is nothing to sneeze at it. But the problem for APRN stock is how the company is driving those sales — and how, exactly, the company is supposed to turn those sales into profits.
APRN Stock Needs Profits — Eventually
The fact that Blue Apron isn’t profitable in and of itself isn’t a death knell to the bull case. APRN still is a growth stock, and it’s spending at the moment to establish share and drive adoption. The subscription-based model is based on spending now to acquire customers, who can provide revenue down the line.
The problem is that the path to profitability for Blue Apron is not at all clear. For one, gross margins are relatively small: 31.2% in Q1, and 33% in full-year 2016. That limits the profit contribution from additional sales. Secondly, marketing spend is a huge portion of revenue: 18% in 2016, spiking to nearly 25% in Q1.
Blue Apron claims the marketing spend is justified by per-customer revenue figures. In the six months after the first order, acquired customers contribute $115 in gross profit — against acquisition costs of $94. That sounds like reasonable payback.
But it’s not enough, and what has to be concerning is that per-customer figures aren’t growing. In 2016, customers ordered $387 in meals in their first six months — down from $451 the year before. Average revenue per customer basically hasn’t moved, either. Nor has average order value.
What the numbers seem to show is that Blue Apron is acquiring more customers – but not necessarily better customers. Reaching 1 million customers in Q1 is a notable accomplishment. But there’s little evidence that those customers are staying longer, or becoming long-term, consistent buyers. Rather, many seem to be taking advantage of initial offers, trying the service — and moving on. (As a matter of fact, that’s precisely what my wife and I did last year.)
Competition Is On the Way
If investors weren’t unnerved enough by Blue Apron’s financials, a major deal in the grocery space shook their confidence. The acquisition of Whole Foods Market, Inc. (NASDAQ:WFM) by Amazon.com, Inc. (NASDAQ:AMZN) creates a ready-made competitor for Blue Apron. In fact, the combination of Amazon’s distribution platform and Whole Foods’ natural and organic supply chain might be an improvement on Blue Apron — particularly given in-store pickup.
Kroger Co (NYSE:KR), meanwhile, has rolled out a similar offering. And other startups like HelloFresh and HomeChef have their own offerings — and their own advertisers.
$7.50 might sound cheap for APRN stock — but it still values the company at roughly $1.6 billion. And given that Blue Apron might never make a dime in profit, that still sounds like far too much.
As of this writing, Vince Martin has no positions in any securities mentioned.
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