Blue Apron's (APRN +0.00%) turn in the spotlight hasn't been as glamorous as it had hoped.
First, the nation's leading meal-kit provider was forced to slash its price offering price from $15 to $17 a share to just $10. Investors seemed nervous about the threat posed by Amazon's (AMZN 0.87%) coming takeover of Whole Foods Market (WFM +0.00%) and other questions lingering about the company's business model.
Shares of Blue Apron fell in six of its first eight sessions, dipping as low as $7.10, or 29% below its IPO price, with a market cap hovering around $1.5 billion, much less than its $2 billion valuation in a private funding round back in 2015.
Image source: Blue Apron.
It was a remarkable rejection for a company that has attracted so much attention from the media -- and the market -- as the meal kit industry has drawn in dozens of start-ups, with major supermarket chains and packaged food companies dabbling in it as well. As the biggest meal-kit provider in the U.S., and the first to go public, Blue Apron was supposed be feted by Wall Street, not spurned.
Clearly, investors have turned sour on the recipe specialist, but it's too soon to call Blue Apron a dud. Here are three reasons the stock could bounce back.
1. The possibility of an acquisition
Blue Apron is the leader in a fast-growing industry, which makes the brand an attractive buyout target for a wide range of companies, including supermarket chains and private equity firms. Much like Amazon bought Whole Foods because it struggled to break into the grocery industry on its own, Amazon could turn around and acquire Blue Apron if the price is right. Wal-Mart Stores, Inc. (WMT +0.99%) also makes sense as a potential suitor. The retail giant has been snatching up e-commerce companies and is already the country's largest grocery seller. Considering Wal-Mart's economies of scale and distribution prowess, Blue Apron could be a perfect fit with its strategy as it seeks to scale up its e-commerce business and target a new customer base.
The potential for outside interest should put a floor on the stock, which I'd estimate at around $5, or a market cap of around $1 billion. With revenue set to pass the billion-dollar mark this year, that would make Blue Apron exceptionally cheap for an e-commerce stock.
2. Industry consolidation
The counterpoint to Blue Apron's being acquired is that the meal kit industry is likely to see consolidation in the coming years. With dozens of businesses operating in the sector, some will go bankrupt while others could be acquired, eliminating competition and allowing customers to concentrate in the hands of the remaining players who could build scale. Blue Apron could potentially be one of the acquirers, especially as struggling rivals would likely sell for cheap. Taking over smaller brands or merging with another large meal kit service like Plated or Hello Fresh could be an option for the company if sales growth flags and profits fail to materialize.
It's still early days in the meal kit industry -- Blue Apron is just five years old -- and the upcoming consolidation in the sector will be a definite benefit for larger players such as Blue Apron.
3. Secular forces are providing a tailwind
Some have argued that meal kits are a fad, but there are at least two important trends that should boost growth in the industry over the coming years.
First, delivery is getting more popular. Dubbed the stay-at-home economy, companies that enable customers to get what they want without leaving the home are prospering. There's Amazon for pretty much anything you can think of; Netflix for streaming TV shows and movies; and food delivery concepts like Domino's Pizza and Papa John's, which have thrived while other restaurants have faltered. Shares of GrubHub (GRUB +0.00%), the restaurant delivery portal that would seem to offer many of the same benefits and risks as Blue Apron, were notably unchanged by the Amazon-Whole Foods announcement.
Delivery is a core benefit of Blue Apron as it saves customers valuable time from having to visit the grocery store to shop for dinner, and that value should increase as demand for delivery grows.
Second, healthy eating is on the rise, and cooking at home is generally healthier than eating from a restaurant, where you don't know what ingredients are in the food, and fat and sugar sources are often added to dishes. Blue Apron's meals also enable portion control and help eliminate food waste. Not all of its ingredients are organic, but many of them are. The company only uses beef, pork, and poultry without hormones, and it estimates that the standards for its meat are higher than more than 90% of what's sold. Its seafood is also sourced according to the standards set by the Monterey Bay Aquarium Seafood Watch.
Those three factors alone won't make Blue Apron a success, but they should give investors some comfort as the business isn't the disaster the market seems to think it is right now. The company still needs to deliver strong revenue growth and work toward profitability, but the stock is stronger than investors have given it credit for thus far.
