Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Blue Apron Holdings, Inc. (NYSE:APRN) may not be the literal worst IPO of 2017, but it's certainly in the running. Since going public at $10 in June, Blue Apron stock has plunged 47% -- but things may get better soon.
At least, so says Guggenheim Capital. This morning, the Chicago-based investment banker made a splash in the markets when it called a bottom on Blue Apron stock, initiating coverage with a buy rating and a $9 price target. If Blue Apron gets there, the meals-by-mail provider still won't make it all the way back to its IPO price, but for new investors, that will be OK. A move from today's $5-and-change stock price to $9 will result in a per-share profit of more than 70%.
Is that how things will play out? Here are three things you need to know.
1. Business is booming at Blue Apron
Blue Apron stock has been a disaster for investors -- no two ways about it. But Blue Apron's business has been booming nonetheless. In three years, revenue at Blue Apron has exploded over 10 times in size, from less than $80 million recorded in 2014, to more than $900 million booked over the last 12 months (according to data from S&P Global Market Intelligence).
Guggenheim expects the growth to continue, albeit at a more conservative, less barn-burning pace. As explained in a note on StreetInsider.com (requires subscription) today, the analyst is predicting Blue Apron's sales, which approached $800 million in 2016, will roughly double to nearly $1.6 billion by 2020.
2. But Blue Apron is bleeding red ink
That being said, not all is well at Blue Apron. Last quarter, sales grew 18% year over year. If maintained, that rate of sales growth could conceivably result in a doubling of revenue in four years, as Guggenheim predicts. Problem is, to generate that kind of sales growth, Blue Apron had to grow its cost of goods sold by more than 28%, and its selling, general, and administrative expenses by nearly 49%.
When costs rise faster than revenue, that's generally bad news for profit margins. And indeed, even bullish Guggenheim admits that it expects to see Blue Apron lose about $1 per share this year, and a further $0.75 next year as well. On average, the 11 analysts following Blue Apron stock today expect to see losses continue through at least 2020, with only a faint hope at profits emerging in 2021.
3. The flow must be stanched
Will that be soon enough to save Blue Apron? Guggenheim puts a brave face on the numbers, arguing that with $260 million in cash in the bank, Blue Apron has money "sufficient to fund the business for three more years with similar performance and [to] cover near-term funding requirements."
Problem is, three years is not four years. If Blue Apron can't turn profitable before 2021, the company may well run out of money before it earns its first profit, and may need to sell more stock to stay afloat.
The most important thing: When red ink flows, sharks circle
Meanwhile, Blue Apron's meal-kit-by-mail area of the market is started to pretty crowded. Last week, we learned that privately held supermarket chain Albertsons has acquired Blue Apron rival Plated, creating a big private-equity-backed rival to the company's business. Grocery giant Kroger (NYSE:KR) began test-marketing meal kits in Cincinnati as far back as May, and plans to expand the initiative tenfold, selling the kits out of 40 stores by the end of this month.
And of course there's Amazon.com (NASDAQ:AMZN). The biggest fish in retail, Amazon is said to have its own meal-kit business in the works, and is already selling kits by third-party providers on its site. With the big base of operations gained by its purchase of Whole Foods, it's only a matter of time before Amazon rolls out a wide-reaching rival to Blue Apron.
Best-case scenario: Given the mounting competition, I see little chance that Blue Apron will be able to cut its marketing costs enough to turn profitable sooner any sooner than expected -- and that means that Blue Apron will run out of money before it begins earning profits.
Worst-case scenario: The company may soon be so swamped with rivals, and so deeply unprofitable itself, that it may be forced to sell out or close up shop entirely.
Upgrade or no upgrade, the bull case for Blue Apron doesn't look much better today.