Since Blue Apron’s IPO in June, the share price of APRN has cratered 66.7% from its opening price of $10.  Blue Apron’s post-IPO performance has been the worst in recent memory, which is why I’m snooping around the stock again this weekend.

After the release of the company’s earnings report of Nov. 2, APRN was hit hard, falling from a $5 handle to a $3 handle within four days.  Two issues of the report stood out to me as problematic for traders of the stock, both of which I want to address here as reasons to become interested in the stock now that APRN trades at a depressed price.

First, on a year-over-year basis, the company’s customer count dropped 6%.  According to management, the drop was expected due to a shift of marketing away from expense additions of unlikely long-term and marginal subscribers of its business.  That’s the bad news.

The good news from my standpoint is, I’m okay with the strategy.  Blue Apron’s pruning of its customer base is not the first time a company has shed marginal and unprofitable customers.  In fact, this strategy is MBA textbook stuff.  

I remember when I was a new trader, looking over the management discussion section of a company’s SEC quarterly reports (some reports offer this, and I don’t remember the company), when I came across the company’s analysis of its customer base, in which they determined that it was spending 80% of its marketing and operational expenses on the bottom 20% of its customers (something like that).  And sure enough in the following 10-Q, the number of customers dropped, but margin spiked.  I think this is what’s going on with Blue Apron, so I’m not concerned about the drop of the number of customers.

So, back to Blue Apron’s earnings report.

Blue Apron grew revenues by 3% and slashed marketing costs by 31%, year-over-year.  As a percentage of sales, marketing expenses calculated to 16%, compared with 24% during the same quarter last year.  And per-customer revenue spiked 8% to $245 from $227, year-over-year.  Hmm.  To my way of thinking, this is success: a 3% jump to revenue to go along with much higher margins?  That’s how to right-size your marketing spend.  Isn’t it?  Of course.

Second, the delays and unexpected expenses regarding the company’s new fulfillment center in Linden, N.J. isn’t good, but it isn’t bad, either.  Why?  Traders can now pick up the stock at approximately $3 instead of $5.  In return, Blue Apron is delayed creating the most efficient fulfillment center in the industry, an industry by the way, that is expected to culminate to Blue Apron selling $2 billion per year by 2023, according to KeyBanc Capital Markets analyst Edward Yruma.  And I agree with Yruma.  His estimate might turn out to be conservative, too.

The U.S. spends $1.4 trillion between grocery shopping and restaurants.  That’s a huge pool to play in, and I expect Blue Apron to get a good-size chunk out of that $1.4 trillion, especially as more and more busy, high-income Americans jump on the powerful trend of cooking at home as a wholesome and healthful way of eating.  And the most efficient operators will survive the eventual consolidation.  That’s where the Linden facility might cement Blue Apron as a ‘player’ for the longer haul.

So, what do you think executives from much, much bigger companies, who want to enter this industry, might think about Blue Apron’s efficient cost structure?  Ha?  Akin to how Big Pharma operates, the mega players in the grocery business search for all moving parts they need to build or acquire to enter the space.  And a cost-efficient business (think Amazon. Ouch!)  That’s the game today, folks: high efficiency, low cost structure and fiercely-low retail pricing.

Now trading at 66 cents on the sales dollar, APRN is priced at approximately 25% of an average takeover price.  That’s right.  Companies with similar business models as Blue Apron’s have already been acquired by as much as three-times sales.  APRN is very depressed with the possibility of a takeover factored into my thinking.

And as far as timing a trade, APRN looks pretty good right now.  The stock appears to be finding a bottom at the $3 handle.  The percentage of those traders short the stock’s float is a whopping 47%!  Oh, and the announced capital raise is already priced into the stock, so that typical bombshell news is out of the way.

APRN looks attractive to me at anywhere near $3.

The diary of a real $$$ trader!

Jason Bond