Blue Apron, Snap and the recipe for a disastrous IPO
Investor expectations ‘not managed’
Blue Apron Holdings Inc.’ s brief but nightmarish time as a public company grew even grimmer on Thursday, as the U. S.- based meal kit provider reported a US$ 31.6- million loss for the second quarter.
The latest earnings helped drive Blue Apron shares down 17.6 per cent on the day, with the stock closing at US$5.14 — a 48.6-per-cent drop from the company’s initial public offering in June.
But it’s not the only highprofile IPO in 2017 that took a beating on Thursday.
S hares of Snap Inc. were already trading below t heir US$ 17 March I PO price, even before the Los Angeles- based social media and technology company reported a second- quarter net loss of US$ 443 million after the market closed on Thursday. Snap’s stock price dropped 15 per cent in afterhours trading to US$11.70 as of 4:35 p.m. ET.
The punishment the two companies have taken could be linked to the high hopes analysts and investors may have once had for them.
Kathleen Smith, principal at Renaissance Capital LLC, a manager of IPO exchangetraded funds, said in a phone interview on Thursday that companies preparing to go public should make managing expectations a top priority. This includes massaging investors’ predictions of post- IPO results, as well as the company’s own ideas about its valuation.
“They were not managed,” said Smith of expectations for Blue Apron and Snap. “And today, we saw another disappointment from Blue Apron.”
In announcing its secondquarter results on Thursday, Blue Apron revealed it had cut down on marketing costs by US$ 26.1 million compared to the first three months of 2017, to US$ 34.5 million. But Blue Apron also reported a US$ 31.6- million net loss for the quarter, as well as 93,000 fewer customers, a nearly nine- percent decline that left it with 943,000 patrons.
To avoid problems post-IPO, Smith says it’s also in a company’s interests to ensure shareholders are given a seat at the table. Snap’s IPO, for example, only involved non-voting shares.
“Public holders at some point get sensitive about whether companies are paying attention to their interests,” said Smith. “And if a public shareholder doesn’t have a vote, or if the companies still operate like private companies, they might as well stay private.”
Jay Ritter, a professor at the University of Florida who studies IPOs, says getting bigger, faster, is now more important than it used to be, which has been con- tributing to a slowdown in the number of IPOs.
“S o meti mes organic growth just takes too long,” Ritter said in a phone interview. “So a lot of startups that a generation ago would have gone public and remained as an independent company are instead selling out to a big company in a trade sale.”
A lag period could lead to disenchantment, and neither Blue Apron nor Snap had been profitable before they pulled the trigger on their IPOs, Ritter said.
“When you fail to meet those expectations, those optimistic expectations, disappointment is going to set in,” he said. “That happens with a lot of younger companies where they haven’t established a long track record in a stable business.”
Blue Apron stock has been under additional scrutiny with Amazon. com Inc. now selling its own meal kits, in addition to the e- commerce giant’s acquisition of Whole Foods Market Inc., which puts it squarely in the food business.
On top of the competition from Amazon, a recent Barclays research report noted that customer churn in general was the biggest problem facing meal kit providers.
“If meal kit providers ( including Blue Apron) can’t bring down the high churn, the heavy investments in customer acquisition that are happening now and for the foreseeable future won’t translate to sustained growth or scale, and as soon as funding runs out growth will collapse,” added the report, which was dated July 24, prior to Blue Apron’s second-quarter earnings.
Snap is also facing competition from the likes of Facebook and Facebook- owned Instagram, which has tacked on some very Snapchat- like features recently, such as stories.
Keeping an eye on the competition can’t hurt, said Smith.
“Companies should be properly fearful of competitors, especially big ones, such as Facebook and Amazon,” she said. “It’s not that you can’t win against those, but they can be crushers.”
There could be more pressure on Snap this month as another lock- up period for employees holding shares of the company expires. Ritter says there is typically a small “dip” in a stock’s price when this happens, but it’s not the key concern.
“What matters in the long run is the company executing its business model,” said Ritter. “Other things like analyst coverage, lockup expirations, are just minor things that have temporary effects.”