With a stock price of $2.44 and a market cap of just under $85 million, Blue Apron (APRN +0.00%) has fallen to penny stock status -- a far cry from the $1.9 billion it was worth when it went public in 2017. But the situation could get even worse for the embattled meal kit company. Let's discuss why investors should stay away from this money-losing business.
An incredibly weak economic moat
The term "economic moat" refers to a business's ability to maintain a competitive advantage over rivals in the same industry. This is key to a company's success because it enables it to sustain healthy market share and profit margins over the long term. Unfortunately, Blue Apron has been unable to achieve this, despite being an early leader in the online delivery meal kit niche.
NASDAQ: APRN
Key Data Points
At the time of its initial public offering (IPO) in 2017, Blue Apron enjoyed a 40% share of the U.S. online meal kit industry, compared to its closet rival, Hello Fresh, which only had a 28% share at the time (according to data from Vox). But by 2020, Blue Apron's market share had collapsed to just 9%, while Hello Fresh grew its share to 69% over the same period.
The meal kit industry has relatively little differentiation between services and low customer stickiness because people can easily switch between platforms or choose alternatives like buying their own groceries. Blue Apron failed to create a value proposition for consumers that could overcome these challenges, and shareholders are paying the price.
Operations are faltering
Blue Apron's second-quarter results highlight the weakness in its operations. Revenue grew by less than 1% year over year to $124.2 million -- 48% less than the $238.1 million the company generated at this time in 2017. That said, management plans to jump-start growth through a strategy called The Next Course, which aims to regain market share through marketing, strategic partnerships, and new products.
Image source: Getty Images.
In June, Blue Apron inked a deal with Walmart to offer subscription-free meal kits on the grocery chain's e-commerce platform, Walmart.com. The company is also working with health and wellness companies, like Planet Fitness and Blue Cross Blue Shield, through an initiative called Wellness360. The logic here is that such partnerships could attract motivated customers who are possibly interested in joint offers. But so far, it is unclear what impact, if any, these efforts have had on Blue Apron's top-line growth. What is clear, however, is the company's spiraling losses.
In the second quarter, operating losses jumped 84% to $22.67 million because of large increases in marketing, general, and administrative expenses. The company's losses look likely to accelerate as it pursues its new strategy.
Cheap for a reason
With a price-to-sales (P/S) ratio of just 0.16, Blue Apron's stock is worth less than 20% of its annual revenue. While this valuation looks staggeringly low compared to the S&P 500's average of 2.29, Blue Apron is cheap for a reason. The company has failed to create an economic moat, sales are on a downtrend, and management's turnaround strategy looks likely to accelerate operational losses with no guarantee of success.
