Blue Apron's IPO isn't a bad sign for other unicorns- here's why

June 29, 2017

Relative to how things looked for awhile, Blue Apron's IPO was a disappointment. At the high end of the previous range ($15-17/share, or $3bn of market cap), it was set to mark an "up round" from the last private valuation, validating the valuations of many other unicorns and "opening up the window" for other tech IPOs this fall after a surprisingly quiet spring. 


Instead, the company was forced to cut its IPO price to $10/share, and the modest appreciation on the first day of trading suggests that was the right move (kudos to the company/bankers for recognizing reality and responding- that isn't always easy). In the press, Amazon's acquisition of Whole Foods was a convenient soundbite to explain why this happened: after all, a fierce deep pocketed competitor is not a great thing to have and numerous other companies (including GrubHub and grocers like Kroger) have seen their share prices slump on the potential for more direct competition with the Bezosian juggernaut. 


That is one factor, to be sure, but I'd argue that Blue Apron's repricing was a foregone conclusion even before the Amazon acquisition of Whole Foods was announced. The business had been deteriorating on traditional metrics for quite some time, and the valuation it trades at today (~$1.9bn market cap) is reasonable in light of that. This isn't to say Blue Apron is a bad company- quite the contrary, as they've built an exceptional business of huge scale. Still, things simply haven't been going well enough to merit a $3bn valuation as the initial range implied. So when we consider the implications for other IPOs, Blue Apron's tough start is not a sign that the "window is closing" but rather a sign that the market is functioning well and valuing companies on their merits. There is no evidence that Blue Apron's valuation is unfair, and in fact it is in-line with businesses that look similar financially. 


Why I say Blue Apron's business had been deteriorating:


First, let's walk through what has happened with Blue Apron's business over the last five quarters. In Q1 of 2016, things looked great. The company was just around breakeven (red line, right axis), growing 250% year over year. Great stats for a subscription business.


Since then, things have gotten worse. Margins have declined, as has growth. In Q1 of 2017, Blue Apron grew revenue 42% year over year, and had a negative 20% net income margin. 


This doesn't just show up in the financial statements. Despite significantly higher marketing spend (digital advertising, TV, etc.), Google searches for "Blue Apron" fell year on year in May for the first time ever. This is an important top of the funnel metric for the company, and suggests that it is running uphill to acquire higher volumes of new subscribers. 




How I think about Blue Apron's valuation:


So given this, how should we go about valuing Blue Apron? As I've described in prior posts, I prefer to look at subscription businesses on EV/Gross Profit, which is especially relevant here since grocery delivery is a lower-gross margin business than many other subscription businesses. I then look at free cash flow margin and gross profit growth, adding the two together to get a sense for what the right multiple is. Because Blue Apron's metrics deteriorated throughout 2016 to a degree I've rarely seen before, I opted to use my forecasts for 2017 to drive the analysis. My model assumes that the business continues to deteriorate, but at a much slow pace going forward. 


The chart below show's how APRN stacks up to public comps on growth and profitability. All in, the company simply isn't growing very efficiently. A year ago, it would have been way off the top of the chart in a good way. Today, it looks set to have a meaningfully negative free cash flow margin (x-axis) and generate slightly below average growth (y-axis).


Turning to valuation, I sum the two values form the plot above and compare the result to companies' EV/Gross Profit multiples. Here, we see that APRN trades pretty well in-line with what we'd expect given what its financial metrics are likely to be- especially given that some aspects of its business are less attractive than a pure SaaS model, and that it has deep pocketed competition now from the likes of Amazon.



So overall, the takeaway is that Blue Apron's valuation makes quite a bit of sense given what I see in the operating results. Importantly, this means that other startups shouldn't necessarily take APRN's IPO struggle to mean that they can't come public. This isn't a company trading at a tragic discount to comps reflecting a skittish/overly pessimistic investor base, but rather one that was overvalued at the initial price range. There's nothing in this new datapoint to suggest that high quality companies like MuleSoft/Okta couldn't come public today and garner the super-premium EV/GP multiples they deserve. 


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