Blue Apron – Size 12s.

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Amazon’s size 12s causes dismay for Blue Apron and Hello Fresh.

  • The saga of Blue Apron is rapidly becoming a horror story that could end in acquisition as I think that rushing to IPO too early has now made it extremely difficult for the company to raise new money.
  • Blue Apron is a food delivery company that sends its members boxes with the exact ingredients required to cook entire meals at home.
  • Members pay a subscription in order to receive a certain number of meals per week.
  • It is exactly the same as Hello Fresh which operates out of Europe and is part of the Rocket Internet group.
  • The proposition is quite simple in that by cutting out wholesalers and distributers it can offer good prices on high quality ingredients making the service inexpensive enough to attract cash rich, time poor customers.
  • The problem is that Amazon’s clearly intends to stomp on these businesses with its acquisition of Whole Foods and its application for a trade mark to enter this line of business.
  • This has decimated the valuation of Blue Apron and, I suspect, sent waves of panic through Hello Fresh.
  • Prior the Whole Foods announcements, Blue Apron was expecting to IPO at $15-17 per share and as of the close of trading on 17th July 2017, the shares were valued at $6.59 some 59% below where it was just a few short weeks ago.
  • The bigger problem is that Blue Apron has massively ramped up both operating and capital spending ahead of its IPO.
  • In Q1 17 Blue Apron lost the same amount of money that it did in the entirety of 2016 and also spent $50m on capex which it finanaced by raising debt.
  • Hence, I reckon that after paying off the debt, Blue Apron has around $250m in the bank which is not going to last very long with losses running at $50m per quarter.
  • Hence, it either has to generate profit soon (unlikely) or raise more money.
  • This is going to be extremely difficult because with the share price 59% below where it was expected to be and Amazon coming head-on, no one is going to want to finance the company.
  • The further problem is that Amazon new found scale in groceries will mean that it will most likley undercut Blue Apron and Hello Fresh and still offer consumers better quality produce with more reliable delivery.
  • The one advantage that Hello Fresh has over Blue Apron is that it operates in Europe where Amazon has yet to arrive with groceries giving it time to react and that it is backed by the much larger and better financed, Rocket Internet.
  • If Blue Apron had remained private, this issue would not be nearly so acute as one would only be able to speculate on the impact on Blue Apron’s valuation rather than see it in the cold light of day.
  • Hence, I can see Blue Apron’ valuation continuing to fall and then being acquired, potentially by the behemoth that has been the architect of its woes.
  • I see no bargain to be had and would steer well clear of this.

 

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.