Oppenheimer is initiating coverage on Blue Apron Holdings, Inc. (NYSE:APRN) with an Outperform rating and an $11 price target based on a blended DCF and comparable analysis. As the largest vertical operator in the "subscription meal kit" industry, Blue Apron will attempt to use its scale, expertise, and newfound capital depth to maintain share in a fast-growing market.
While the headwinds are clear—rising CPAs, potential competition from scaled players, and generic product offerings— Oppenheimer believes that new frequency and recipe options should reduce churn, although this effect will be partially offset by lower order value, on average. Meanwhile, the company's already attractive gross margin profile should continue to improve. With shares now at 0.9x 2018E sales, Oppenheimer see risk/ reward weighted to the upside.
Market opportunity is huge at $524B. Oppenheimer calculates the TAM based on a haircut framework using the size of the grocery & restaurant markets. This large market should buoy the growth of the meal kit industry, which should drive Blue Apron's revenue growth over time. Blue Apron can spend to maintain share vs. sub-scale subscription meal kit competitors.
New frequency and recipe options in southern and western markets should moderate churn. However, product differentiation remains challenging. Oppenheimer experience with meal kits has led us to believe preference is subjective, not objective. Over time, Blue Apron will rely on investments in brand spending to create differentiation from other vertical players in the space.
Understanding 2017 cohort first six months' revenue critical. In 2015, Blue Apron generated $451 on average during first six months of a customer's life. In 2016, it was $387. Given CPAs are rising (offset partially by increasing margins), stabilizing first six months' revenue or improving out period cohort-level churn is important to driving sustainable growth.
Competitive risk priced in at 0.9x 2018E sales, in Oppenheimer’s view. Entry of scaled brick & mortar grocers, as well as Amazon, clearly presents risks for Blue Apron. However, at 0.9x 2018E sales, the stock is trading at a discount to Shutterfly and Cimpress, while growing significantly faster. To Oppenheimer, this indicates risks are adequately discounted at these levels.
Oppenheimer uses a blended DCF (25%) and comps (75%) approach. Oppenheimer overweight comps based on the effect of low terminal visibility in DCF. In the comps analysis, Oppenheimer values the company at 1.4x/1.1x 2018/2019 sales, cheap in Oppenheimer’s view, given growth prospects relative to peers. DCF analysis assumes 15% discount rate to account for risk and 10x terminal multiple.