Every dog has its day. Beaten-up meal kit maker Blue Apron Holdings Inc (NYSE:APRN) just had its day. While the stock was already trending higher due to a new CEO appointment and reaffirmed second-half financial guidance, APRN stock shot up a blistering 16% on Dec. 4 when Barclays upgraded the stock from “Underweight” to “Equal Weight”.
That was a big move. It was the first time since the IPO that a major investment firm upgraded APRN stock.
Barclays is bullish on the new CEO’s ability to steady the business and believes that downside is protected by potential M&A prospects.
But regardless of who is at the helm, APRN stock is still a dog. Revenue growth has come tumbling down, losses are widening and competition is increasing. It’s tough to see a world in 5 years where Blue Apron is a relevant player in the meal kit delivery space.
And even if you are doing some bottom-fishing, don’t let the $4 price tag fool you. This stock is way overvalued considering its muted growth prospects.
Overall, I say fade the rally in APRN stock. The story reminds me too much of a Fitbit Inc (NYSE:FIT) in the meal kit space — meaning bigger players can easily squeeze APRN out whenever they want to.
Too Much Competition for APRN
Revenue growth at Blue Apron has gone from 338% in 2015 to 133% in 2016 to 3% last quarter.
Talk about a slowdown.
All that means is that APRN is starting to face a ton of competition. Much like Fitbit did in the wearables space, APRN showed that there was a demand for meal kits and meal kit providers. But once there was proof of value in the market, bigger players stepped in and ate APRN’s lunch.
Everyone wants to talk about Amazon.com, Inc. (NASDAQ:AMZN). The e-commerce behemoth has debuted its own fresh meal kits and is particularly levered to dominate this space given the company has a ton of fulfillment centers, is building out its own logistics network and owns nearly 500 Whole Foods stores.
But the competition stretches far beyond Amazon. There are other specific meal kit companies such as Hellofresh SE (ETR:HFG), Home Chef, and Tastefully Simple. Then there are also grocery stores, which could easily package their own meal kits and use a ride-sharing service like Uber or Lyft for delivery. Considering Wal-Mart Stores Inc (NYSE:WMT) and Target Corporation (NYSE:TGT) are also both in the grocery space, the list of potential future competitors is quite intimidating.
So, it’s hard to imagine Blue Apron remaining a viable player in the meal kit delivery space. The most likely outcome for this space is that dominance is shared between Amazon, Walmart, Target and a handful of grocery stores. Blue Apron will be a footnote.
Valuation on APRN Stock Makes No Sense
All things considered, APRN isn’t a double-digit revenue-growth company. At best, revenues grow at 5% per year over the next 5 years. That puts revenues at just over $1.1 billion in 5 years.
APRN also isn’t a company that will have huge profit margins. Gross margins, at their peak, were just above 30%. They have come down quite a bit due to higher infrastructure costs (necessary to support expansion) and higher food costs (necessary to satisfy customers). Consequently, it is unlikely that gross margins pop back up to 30%, although there is an outside possibility that they do.
Meanwhile, there is also an outside chance that the operating expense rate falls to 25%. The marketing expense rate has come down quite a bit, but it’s still at 15%. Revenue growth could drive that down to 10% in 5 years. Meanwhile, other expenses (which currently are running around 30% of revenues) could fall down to 15% with solid revenue growth.
Bottom Line on APRN Stock
Overall, then, APRN could be looking at 5% operating profit margins on just over $1.1 billion in revenues in 5 years. That implies operating profits of just over $55 million. Slap a 35% tax rate on that, and you get to net profits of about $36 million.
APRN’s current market cap is over $700 million. That means that APRN stock is trading at 20 times best-case earnings that are 5 years out.
As noted previously, it’s tough to see Blue Apron being relevant in 5 years in the market it pioneered. Because of that, it’s tough to see APRN stock producing outsized returns from these levels.
As of this writing, Luke Lango was long AMZN and TGT.
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