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Why the Feasting in Blue Apron Stock Will Soon Turn to Famine

By Will Healy - Mar 28, 2020 at 9:25AM

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Any return to normalcy will likely hurt the company.

One of the more surprising winners in the COVID-19 crisis has been Blue Apron (APRN -5.97%). With much of the country forced to stay home, the meal kit provider saw a sudden surge in orders. Investors subsequently bid the beleaguered stock higher amid this unexpected increase in demand.

However, earnings forecasts still do not point to profitability. Moreover, at some point, conditions will return to normal. While the increase in Blue Apron stock may offer some relief to investors, this recent rally looks more like a selling opportunity than a sustained comeback.

Coronavirus saves Blue Apron, at least for now

Early this year, Blue Apron stock was approaching penny-stock status for a second time. The 1-for-15 reverse stock split initiated last June did nothing to prevent Blue Apron from continuing its extended decline. The stock had fallen to as low as $2.01 per share in early March.

However, with coronavirus forcing restaurants across the country to close their doors, Blue Apron saw a sudden surge in business. The company even ramped up hiring in an environment where companies have laid off millions of workers.

Investors took notice. The stock spiked as high as $28.84 per share before falling back to around $11 as of this writing. Blue Apron likely experienced a short squeeze, as investors have long held a bearish outlook for the company.

A woman grabbing a carrot from a box of vegetables as she checks her tablet.

Image source: Getty Images

The recovery is not as robust as it appears

Still, investors have to remember that Blue Apron stock launched its IPO at a split-adjusted price of $150 per share. Investors should also recall that the company faced intense headwinds from the beginning. The announced merger of Amazon and Whole Foods undermined its IPO momentum in July 2017. Grocery giants such as Kroger subsequently entered the meal kit business as well.

The problem Blue Apron must contend with is one that has plagued meal kit services from the beginning, namely the lack of a competitive moat. Any company can launch a competing meal-kit business. Yes, coronavirus has temporarily increased the size of the market by scaling back the restaurant industry. However, at some point, the outbreak will subside, and eateries will reopen. At that point, consumers are likely to again lose interest in Blue Apron meal kits just as they did previously.

Moreover, the comeback for Blue Apron stock is not as dramatic as it appears. Yes, it rose about fourteen-fold from trough to peak. However, had the reverse split never occurred, the stock would be trading for around $0.75 per share right now.

APRN Chart

Data by YCharts.

Furthermore, earnings forecasts still paint a bleak picture. Analysts currently expect a loss of $1.54 per share for the current quarter. That is only a slight improvement from the $1.80-per-share loss predicted one month ago. It also comes in below the consensus estimate of an $0.80 per share loss from 60 days prior.

Treat this as a selling opportunity

Considering the challenges that the company still faces, the move higher in Blue Apron stock looks like an overreaction. Before this surprise surge in orders, Blue Apron was exploring exit strategies such as selling itself, merging with another company, or unloading assets. The coronavirus-driven increase in demand has shelved that discussion, at least temporarily.

Admittedly, some customers may like their experience with meal kits and continue to buy after the pandemic recedes. However, even with some increased business, the company still faces wide losses. The company has already failed to show resilience in the face of competition from other meal-kit services and traditional restaurants. This makes it likely that the talk about exit strategies will resurface once consumer habits return to normal.

Unfortunately, such conditions could take Blue Apron shares back to penny-stock status. Given that risk, it probably behooves investors to consider their own exit strategy sooner rather than later.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Blue Apron Stock Quote
Blue Apron
$5.35 (-5.97%) $0.34, Inc. Stock Quote, Inc.
$142.30 (0.14%) $0.20
The Kroger Co. Stock Quote
The Kroger Co.
$49.62 (2.20%) $1.07

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