Mar 19 2020 - Blue Apron: Speculators Piling In

Summary

Blue Apron is surging on hopes that consumers reconsider its meal kit model during the COVID-19 pandemic.

There's no evidence that demand is surging for Blue Apron meal kits during the pandemic.

Blue Apron's services never gained mainstream popularity; if it had it could easily crushed by retailers with stout distribution networks such as Amazon and Walmart.

Expect Blue Apron's cash balance to continue to dwindle, and the market value to further detach from intrinsic value as speculators pile in.

Thesis

ChartData by YCharts

Blue Apron (APRN) is catching a bid amidst the COVID-19 outbreak, a stark reversal for a business that has been on the rocks since its 2017 IPO. Revenue growth has deteriorated over the past several years as meal kits have failed to gain mainstream traction.

But, over the past two trading days, the stock is up nearly 200% as restaurants close and supermarkets shelves get cleaned out as the COVID-19 pandemic unfolds.

"With so many households practicing social distancing and remaining at home, getting fresh ingredients for at-home preparation holds appeal," Bloomberg Intelligence senior analyst Jennifer Bartashus said.

Shares of the meal kit delivery are up more than 50% for a second straight day, while Canadian peer Goodfood Market Corp. increased 44% over the two-day period. Food delivery services Waitr Holdings Inc.'s stock is up 141% since the start of the week and GrubHub Inc. climbed 22% Tuesday.

Some major cities including New York, Los Angeles and Seattle are limiting restaurants to take out and delivery orders. Similar rules have been put in place in states including Illinois, Massachusetts, and Ohio. Meanwhile, supermarkets are being flooded with customers, emptying shelves for some items.

Last month, Blue Apron announced that it's evaluating options to rekindle the business, including raising additional capital or selling assets. If the troubled company can capitalize on the virus-driven boost in demand, it may be more likely to pull off a sale, Bartashus said

Blue Apron short interest is 41% of float, according to S3 Partners.

I believe this faulty logic will increase demand for shares in the short term, thus driving the price much higher. However, it will not cause any change in consumer behavior. Speculating on a price increase is a poor investment strategy, but should Blue Apron continue rise far beyond its intrinsic value, Blue Apron becomes an interesting stock to bet against.

I've covered Turtle Beach (HEAR) numerous times on Seeking Alpha. In Turtle Beach's case, it was clear that the rise in popularity of Battle Royale game Fortnite drove demand for Turtle Beach headsets over a short period of time. Fortnite's Google Trend popularity rose in lockstep with Turtle Beach's share price. Fortnite had a real impact on Turtle Beach's business, even if the demand shock didn't last. In Blue Apron's case there is no evidence that any consumer behavior is changing, nor would it be conclusive that Blue Apron would be able to successfully handle a dramatic surge in demand.

Blue Apron's service should be prospering in a time when people are working from home and schools are shutting down to avoid the spread of COVID-19. This is not the case, which furthers the bearish thesis that Blue Apron is in terminal decline. If Blue Apron is unable to prosper in a time when its service is beneficial, it will never work when restrictions are lifted.

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Google Trends (GOOGL) is an excellent resource to track what is trending with the masses. Neither Blue Apron nor its competitor HelloFresh have seen significant uptick in search volume following in the midst of the pandemic. For this reason, investors will not be fooled that Blue Apron will be able to catapult its business back into the spotlight.

The exception has been Fresh Direct, which Google Trends is projecting a surge in demand. Fresh Direct is more of a personal grocery shopper based in the New York City area, as opposed to meal kit options. Both Fresh Direct and Amazon (AMZN) have experienced challenges based on that increased demand. Furthermore, Blue Apron does not have a strong enough distribution network to handle surging demand.

The Logistics

In times of crisis, supply-chains are critical in moving goods to grocery stores for consumption. Non-perishable goods a preferable if consumers would rather do less shopping to further flatten the curve. Regardless, perishable goods still have an expiration date and unique challenges to keep fresh throughout the shipping process. Blue Apron has just 2 distribution centers after its recent closure of its Arlington, Texas facility. Blue Apron does not have the firepower to compete with any complex shipping network. Simply put, if meal kits did become mainstream, the business would be eaten alive by retailers like Amazon (AMZN) and Walmart (WMT). Blue Apron's business is more of a logistical challenge than a matter of curating meals for consumers.

Financials

Blue Apron's financial disaster is highlighted by its cash balance falling from 9 million in 2017 to million in 2019. The balance sheet is loaded up with 5 million in debt. Blue Apron is on the ropes, and from a valuation perspective represents an intriguing stock to bet against. The divergence between the businesses market value and fair value is drifting further apart. Now would not be the optimal time to make such a bet, as speculators could continue to drive the price higher.

The company has failed to generate positive operating cash flow during its existence, and would need large amounts of capital in order to build out distribution to match Amazon or Walmart.

Speculation

Blue Apron is a speculator's dream because of the oversimplified thesis around Blue Apron's potential benefit from the COVID-19 pandemic. There is no evidence to suggest Blue Apron is benefiting in any form from more people staying at home. Even if that were the case, I would not be willing to bet on that trend to continue once people are able to freely visit restaurants. In any conditions, but especially volatile markets, investors must be able to sleep soundly with their holdings. Quality businesses will work well over the long term. The risk to reward profile is not favorable for betting on the Greater Fool Theory with no evidence that Blue Apron is seeing any surge in demand. Demand is in the shares.

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The number of Robinhood users holding the stock has surged in tandem with the share price over the past few trading days. Flat Google Trends numbers, a rising number of Robinhood users, and parabolic share price action, it is clear owning Blue Apron is a disaster waiting to happen. But, expect the bubble to further inflate before crashing down.

Disclosure: I am/we are long GOOGL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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