Meal kit delivery company Blue Apron Holdings Inc. (APRN) opened trading on Thursday morning at $10 per share, exactly the level of its heavily discounted IPO price reached on Wednesday evening. While many have been critical of the money-losing company, its business isn't in as bad shape as it seems. But there are certainly some big storm clouds on the horizon.
It's easy to be a cynic about a firm like Blue Apron. After all, an unprofitable company whose business involves delivering gourmet meal kits that customers have to cook themselves before eating sounds like something straight out of the Dot.com bubble (anyone remember Kozmo.com or the original Peapod?).
A look under the hood, however, tells a somewhat different story. It shows a company that has delivered impressive growth by providing a fine-tuned service that a certain type of upscale, time-constrained consumer finds genuinely useful. And one that might not be far removed from profitability if it can get its recently-heavy spending growth in check.
To a large degree, Blue Apron's main problem isn't where its business stands today, but how it will look if and when retail giants with large customer bases, tremendous brand power and major cost advantages encroach on its turf. That concern definitely doesn't seem lost on the institutional investors providing a wary response to the company's pre-IPO roadshow.
After initially setting a $15 to $17 IPO price range, Blue Apron priced its offering at a mere $10. That values the online meal-delivery firm at just over $2 billion after accounting for about 12 million stock options exercisable under a 2012 equity plan. In other words, Blue Apron is basically receiving the same valuation it got in a 2015 funding round. Three hundred million dollars is being raised by selling 30 million shares; underwriters have an over-allotment option to buy another 4.5 million.
At $2 billion, Blue Apron would be valued at 2.5 times 2016 revenue of $795 million, and (given its growth rates) perhaps less than 2 times its 2017 sales. For a business that posted 42% annual sales growth in Q1 and had a roughly 30% gross margin, those are pretty reasonable multiples at first glance.
They get more reasonable when one considers that Blue Apron could have easily been profitable last year -- it reported a net loss of $54.9 million, or roughly 7% of sales -- had it curtailed its marketing spend. Of the $144.1 million that Blue Apron spent on marketing in 2016 (up 180% from 2015), $66 million consisted of offline media spend that was largely discretionary. There's also probably some room to cut the $43 million that was spent on online ads, though some of this spending is necessary for driving sign-ups. The remaining $35 million was spent on Blue Apron's customer referral program, and needs to viewed as a recurring expense.