Is Blue Apron’s Flameout an Omen for 2019’s Unicorns?

(Bloomberg Businessweek) -- It was a big week for Blue Apron shareholders. The meal-kit delivery company named a new chief executive officer, someone who’d bring a vision on how to jump-start sputtering sales, and the stock spiked 17 percent in a matter of minutes.

All of which means essentially nothing in the grand scheme of things; the stock is still down 90 percent since its IPO in 2017. The numbers actually could be worse: had the bankers in charge of the deal—a group led by Goldman Sachs Group and Morgan Stanley—stuck to their initial plan and priced the stock at as much as $17, the losses today would be 94 percent. Blue Apron is not only one of the worst-performing IPOs in recent history, but it also seems to underscore the growing disconnect between America’s rich coastal cities and its less prosperous countryside.

The company’s founders—three guys on Long Island—and their Wall Street bankers convinced stock investors, a group well represented in coastal cities, that the business was worth $3.2 billion in part based on the idea that they were going to expand operations all across the country. The goal, according to the IPO prospectus, was to eventually be able to sell meals to 99 percent of Americans. “Blue Apron’s mission is to make incredible home cooking accessible to everyone,” it said in the prospectus.

But with a two-person meal that requires about 30 minutes of preparation in the kitchen costing about $23 with shipping, it’s not clear how realistic that ever was. As it turns out, the company is even struggling to maintain its current roster of clients on the two coasts.

It’s a cautionary tale for the batch of unicorns that plan to go public this year. Ride-sharing company Lyft Inc. made its debut last week, and shares are already struggling to maintain their initial $72 IPO price. Uber Technologies Inc. may come to market as soon as this month, and Morgan Stanley has agreed to help support the stock in early trading hours. Home-rental service Airbnb, messaging platform Slack Technologies, and social media site Pinterest are all on the watch list, too.

Blue Apron isn’t the only unicorn of late that bombed after its IPO. Social media service Snap Inc., seen as a potential rival to Facebook Inc., also went public in 2017. Its shares are down more than 30 percent since the IPO. Facebook’s stock price is up about that same amount over the period.

And while Lyft has been trading only a week, investors are already flocking to bet on its failure. Short sellers clamored to borrow so many Lyft shares on Tuesday—so they could sell them—that funding costs surged, and Lyft became the most expensive stock to bet against, according to IHS Markit.

Part of the issue with these companies is that while they have generated a lot of buzz, their business models aren’t anything special. “Lyft smacks of technology, but under the hood it’s still just people in cars,” says Bill Stone, chief investment officer of Avalon Advisors, which has $8.5 billion in assets under management. “Blue Apron was sexy for a short time because Wall Street loves the subscription model; it seemed to be the perfect intersection between tech and subscriptions, but so far, it isn’t working out.”

Blue Apron hasn’t posted a single profitable quarter. Neither has Lyft or Uber, which could be valued at as much as $120 billion.

“If a business is a disruptor, you know it may struggle to generate profits out of the gate, but you’re projecting that it will grow sales to a point that eventually leads to profitability,” says Matthew Miskin, a market strategist at John Hancock Investments. “For some of these names, it takes more time than people thought, and that can be a real challenge to valuation.”

To be sure, the meal-kit delivery business is seen as an industry with high growth prospects. But gaining market share means pricey marketing expenses, especially as the likes of Amazon.com Inc.’s Whole Foods and other popular grocery chains have encroached on the territory. Analysts also expected Blue Apron’s product prices to come down from the start – but the issue with that is an ability to scale. And while the food service’s ugly IPO is cautionary, it may not necessarily spell doom for every unicorn on the horizon.

“I wouldn’t use Blue Apron as a barometer for anything. To me, Lyft is the first important IPO of the unicorn era. It really is a whole new industry,’’ says Wayne Kaufman, chief market analyst at Phoenix Financial Services. “Blue Apron was niche, not the start of a new industry.”

But the hype itself surrounding those to come can be a problem. “There could be a certain cachet to these kinds of names—a fear of missing out—and that can lead to excess expectations,” says Joshua Pierce, director of research and portfolio manager at Baystate Wealth Management, which manages $1.2 billion. Facebook’s stock fell 30 percent during its first year of trading. Even so, shares have more than quadrupled from its $38 IPO price.

The value of IPOs in the U.S. this year could reach as high as $100 billion, according to the latest estimates from UBS Group AG. “The ultimate deciding factor is if these unicorn companies can actually live up to the hype,” says Jason Draho, head of Americas asset allocation at UBS Global Wealth Management. “This won’t be determined on the first trading day, as past high-profile IPOs have demonstrated. As a result, we believe this year will probably play out as a slow burn, rather than as a hot market.”

To contact the editor responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Silvia Killingsworth

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