(Bloomberg Opinion) -- If you’re in the business of food delivery, this might be as good as it’s ever going to get.
That might explain the muted market response to HelloFresh SE’s Monday announcement that revenue this year would almost double. Shares in the meal-kit specialist ultimately traded pretty flat in Frankfurt.
The forecast didn’t come out of the blue. Just last month the company said sales would jump between 55% and 70% this year. Now it’s expecting an increase of between 75% and 90%. It also expects to be more profitable and looks likely to meet its 2021 profitability goal a year earlier than expected. The risk is that things don’t get much better, and the market seems to be pricing that in.
The Berlin-based company delivered 149 million meals in the six months through June. The revenue gains might have been even greater were it not for capacity constraints. HelloFresh simply can’t make enough meals to meet demand, and it’s adding new production sites in the U.K. and the U.S. this year.
The Covid-19 lockdown means that the conditions for such demand probably couldn’t be better. Not only are people working from home, they also can’t go to restaurants as readily. While 50% of a household’s food budget might typically be spent on eating at home, and the rest at restaurants, the virus means that as much as two-thirds is now likely to be spent at home, according to HelloFresh.
Chief Executive Officer Dominik Richter and his team deserve credit for the way they’ve managed the business. They’ve steadily built an efficient operation that generated 281 million euros ($331 million) of free cash flow in the 12 months through June. It’s a stark contrast with U.S. rival Blue Apron Holdings Inc., whose revenue almost halved between 2017 and 2019.
But there are two problems with HelloFresh’s business, which simply delivers meal ingredients that customers then have to cook. First, as the virus lockdowns ease, people will return not just to restaurants but also to offices. And people don’t cook meals in the office. Second, companies such as HelloFresh often talk about their product being habit-forming. But the habit being formed is, in this instance, cooking. And as customers get better at cooking, they may decide that they don’t in fact need HelloFresh’s offering, according to Bloomberg Intelligence analyst Tatiana Lisitsina.
That’s not to suggest that HelloFresh will fall once the virus passes. It has 4.2 million active customers in its 14 markets. There are plenty more customers it can add. But doing so will get more expensive: The German firm will have to spend more on marketing, just as existing customers may be ordering fewer meals.
Even with the improved outlook, HelloFresh looks generously priced, with its 7.7 billion-euro market capitalization valuing it at more than 30 times forward earnings — more than Google or Facebook Inc., as a multiple of earnings.
For now, investor appetite appears to have been sated.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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