As a venture capital analyst — one who’s even helped raise capital myself — I’m agitated but not shocked by the news coming out of Blue Apron (NYSE: APRN).
The company only IPO’d a few short months ago — back in June. Yet we just learned that the fledgling meal kit-maker will lay off 6% of its employees, or approximately 300 people.
The optics here aren’t good.
It looks like management sold the hype around its IPO, knowing that the business itself was unstable.
As a result, Blue Apron shares are under incredible selling pressure — down 50% since its IPO. CNBC reports:
The company [Blue Apron] has seen a strong onslaught of competition for customers from meal kit brands that range from smaller startups like Sun Basket and Green Chef to behemoths like Amazon, which acquired Whole Foods and sells meal kits or Plated, which was acquired by Albertsons in a deal valued at $200 million.
If you didn’t see the Blue Apron meltdown coming, you ain’t seen nothing yet!
Here are three more impending market disasters…
A Recipe for Destruction
The burritos are safe to eat again at Chipotle Mexican Grill Inc. (NYSE: CMG), but their shares are toxic — and still have room to fall.
I said as much last year after the first of Chipotle’s several foodborne illness outbreaks.
And since recommending that investors short the company, the stock is down more than 40%.
Heck, not even a huge investment by activist hedge fund manager Bill Ackman could save the company.
Think you’ve missed out on the downside action?
Not even close…
The company has yet to fully regain the public’s trust since the devastating outbreaks.
In 2016, annual sales fell 13% — to $3.9 billion — from the previous year.
And net income dropped by an eye-popping 95%, to $34.6 million, over the same period.
But it’s not just the outbreaks weighing down the burrito-maker…
The company recently launched its long-awaited queso offering — to scathing reviews from customers and analysts alike.
Worse still, thanks to skyrocketing avocado prices, food costs are eating heartily into earnings.
In fact, avocados were responsible for a 19-cent drop in fiscal second-quarter EPS results alone.
And somehow, this downtrodden stock still trades at 35 times forward earnings — five times higher than the industry average.
All in all, this is a recipe for disaster.
Look out below!
Do Not Ignore This Deadly Market Signal
Acacia Mining (OTCBB: ABGLF), majority owned by Barrick Gold Corp. (NYSE: ABX), is in the middle of a tax dispute.
It suddenly has to pay $300 million in cash to the Tanzanian government.
Yet it says it does not have the money. Yikes…
The stock price is down around 8% in London where it’s mostly traded. Now, that might not sound too serious.
Maybe Barrick will buy more shares… maybe it can raise a loan. And indeed, shareholders don’t seem to be too worried.
But make no mistake: Tax disputes can bankrupt you, even when you are in the right.
Just look at what happened to Primero Mining (OTCBB: PPPMF).
The company had a $1 billion market capitalization and a successful silver mine in Mexico. It also had another gold mine in Canada, which it was edging slowly back to profitability.
It had financed the Mexican mine with a silver sale agreement, selling part of the output at a low price and getting cash upfront.
After some argument, in 2012, the Mexican tax authorities agreed that it only needed to recognize (as income) the low price it received under the silver sale agreement.
Then last year, the local state tax assessor changed its mind. It demanded tax on the full price of silver (which Primero never received).
Suddenly Primero had a huge cash flow problem, especially when the Mexican miners went on strike.
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It got the U.S. government involved with appeals to the Mexican government, but to no avail. It was forced to sell the Canadian gold mine for peanuts.
Now it’s selling its Mexican silver mine, so it will have essentially no assets. The market capitalization is $11 million, 1% of its peak.
Maybe Acacia Mining shareholders should not be so smug.
Another Rotten Meal Kit Investment
On the heels of Blue Apron’s IPO flop, another popular meal kit service, HelloFresh, is on a crash course with failure. Again.
The company already shelved IPO plans in 2015. But its German venture capital owner, Rocket Internet SE, is determined to give it another try.
HelloFresh is planning to raise between $285 million and $365 million in an IPO slated for Nov. 2 on the Frankfurt exchange. That would value the company around $1.5 billion. Keep in mind, Blue Apron is currently trading for about $1 billion.
Of course, this isn’t about price alone. Or the service these companies offer.
To be clear, I used HelloFresh service for months. And I loved it! That is, until the meals started getting sneakily repetitive. A change in an ingredient or two and voila! It’s pitched as an entirely different recipe.
Even if I was still a fan and customer, though, I’d never invest in the company — or any meal kit service company for that matter.
Why? Here are two major reasons…
>>Too little margin: Meal kits are nothing but glorified grocery subscription services. Newsflash: There are next to no margins in the grocery business. In fact, the nation’s leading grocery chains scrape by on paltry margins of less than 5%. Shipping directly to consumers doesn’t magically inflate margins in the space. HelloFresh’s own results underscore this reality. Although revenue is ramping impressively — up 49% in the first half of the year — losses are widening. This trend will only continue as new entrants like Peapod squeeze margins even further by offering meal kits at about half the price of Blue Apron’s and HelloFresh’s offerings.
>>Too much competition: By the same token, entrenched grocery chains aren’t about to give up their paltry, but hard-fought margins to meal kit upstarts. Not to mention the fact that they’re much better positioned from an infrastructure and scale standpoint to compete in the space. And they’re doing so at an increasing rate. Amazon’s recent acquisition of Whole Foods instantly makes them a competitor in the space, too. The only company that wins in a matchup with Amazon… is Amazon.
Another red flag for HelloFresh is management’s intent to use some of the IPO proceeds to add new business lines.
What’s the big deal? Well, food-consulting firm Pentallect Inc. expects the meal kit industry to grow by at least 25% per year for the next five years. Yet HelloFresh is already looking to diversify?
In my experience, such an early pivot underscores the lack of long-term viability for the core business.
Bottom line: The financial press, including CNBC, would like you to believe that the Blue Apron IPO flop “could have been avoided if shares of the meal delivery upstart had been priced better at the onset.” Nonsense. It’s not a matter of pricing; it’s a matter of viability. As stand-alone businesses, meal kit companies are doomed. In turn, so are the IPOs.
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily