The latest victim to have fallen prey to the current trend of disappointing U.S technology IPOs is Blue Apron. Blue Apron is a delivery service company that delivers recipes alongside required ingredients to the consumer’s doorstep.
The company went public on June 28th at a share price of $10 with a market valuation of $1.9bn. Just three weeks later, the share price is down 35% and trading at around $6.52 with the market valuation slashed to $1.3bn. Blue Apron’s downfall can be attributed to a single competitor – Amazon.
Amazon’s Death Sentence
Just prior to Blue Apron’s IPO, Amazon announced its $13.7bn acquisition of Whole Foods, the American supermarket company, signalling its intention to increase its presence in the grocery industry. Armed with a history of aggressive pricing strategies and a massive existing consumer base, the mere announcement of the deal posed an existential threat for grocers.
Underneath its proclamations of pioneering a new, sustainable form of dining, Blue Apron is ultimately a company that delivers ingredients to customers’ doorstep – a grocery company. Hence, its valuation and growth prospects were severely affected by the Amazon’s acquisition. The company was unable to attain the projected $15-$17 share price that it set out to achieve prior to the announcement and eventually went public at only $10 per share.
However, Blue Apron’s troubles with Jeff Bezos’ technology behemoth were far from over. On July 6th, just eight days after the IPO, Amazon filed a trademark application for “prepared food kits composed of meat, poultry, fish, seafood, fruit and/or vegetables . . . ready for cooking and assembly as a meal.” Blue Apron’s stock price plummeted 12% the very same day. Amazon’s direct competition bears grave consequences as it can now do the same thing as Blue Apron for less, with superior delivery infrastructure and a more trusted brand image.
Roadshows are a critical component to the success of a company’s IPO as it influences the investing decision of potential investors by laying the foundation for future business plans and increasing brand awareness. The narrative of high-quality, sustainable and healthy ingredients that the founders of Blue Apron had chosen to market the company with completely fell apart after the Whole Foods acquisition.
Faced with dispirited and skeptical investors, the narrative was promptly substituted with one delineating the company’s marked differentiation in its consumer acquisition strategies and business model from existing grocery companies. The sudden shift in marketing enhanced investor uncertainty and fostered a poor reputation for the company’s management.
Unable to alleviate the fall in investor confidence, Blue Apron was forced to resort to reducing the share price to convince investors to buy it. Apart from having a proclivity to result in higher stock prices, roadshows are often used as a gauge for future growth and investor optimism. The company’s mediocre performance enhanced the self-perpetuating downtrend in its share price and left investors feeling uncertain about the company.
High Private Valuation
Companies which promise revolutionary methods of engaging consumers that build on existing technologies often attract significant interest from venture capitalists, especially due to the current ‘Silicon Valley effect’. As a result, they tend to be overvalued during the private funding rounds, before the public gains access.
When the company is eventually listed on the stock market and releases financial information, investors who are more critical of the tech industry tend to bid against the stock after analysing its financials. Snap Inc. suffered the same outcome when it went public, which raises the question of whether venture capitalists are so captivated by the allure of such companies that they disregard their fundamentals.
Another prominent factor could be the rapid burgeoning of capital inflows from retail investors into index funds, leaving the stock-picking to savvy investors. They would be less enamoured by empty promises from visionary founders and more interested in the practical nature of the business model.
Flawed Business Model
Ultimately, when one blocks out market forces, Blue Apron’s business model is not an impressive one. Its meals cost $10 on average, eliminating a significant portion of the consumer market, leaving it vulnerable to companies that can operate with lesser margins.
Furthermore, its acquired customers can easily switch to purchasing their own food once they learn the recipes and realize shopping locally is much cheaper. Blue Apron lost $52 million in Q1 2017 compared to losing $55 million in the entire 2016, much of which was attributed to marketing costs. In its prospectus, the company’s average customer acquisition cost was listed at $94, so potential customers would have to purchase 10 meal kits for the company to realize a profit from them.
Amazon has been the main cause of Blue Apron’s downfall with a series of strategic moves that essentially destroyed Blue Apron’s unique business model and shattered investor’s confidence in its ability to differentiate itself. Blue Apron’s failure, as well as Snap Inc’s at the hands of Facebook’s Instagram, may have larger implications for Silicon Valley as well as the tech industry itself.
An oligopoly made up of Facebook, Amazon, Netflix and Google is emerging in technology, especially in platforms that interact directly with consumers. The market dominance and aggressive tactics of these companies against upstarts such as Blue Apron could curb innovation and adversely affect the prominent startup ethos in America.
For Blue Apron to salvage itself from its current debacle, possible solutions could be getting acquired by large companies like Wal-Mart, aggressively driving down costs or appealing to a larger consumer base by increasing dietary options and specialization of meal-kits. However, regardless of the direction the company chooses to pursue, it may never be able to achieve its previous valuation and struggle to make a significant impact in the grocery industry.
Whatsapp Launches New Venture Aimed at Businesses
Whatsapp has launched a new app targeted at businesses, called the Whatsapp Business App, which they claim will enable companies to “communicate more efficiently” with present and potential customers.
This forms part of Whatsapp’s wider strategy to branch out into the corporate world. It plans to use the app to generate new revenue by charging businesses for using the extra communication tools that will enable them to better connect with their customers.
Although the app is set for worldwide release, at present it will only be available in Indonesia, Italy, Mexico, the UK and US. It includes a feature which indicates a business is authentic with a green tick badge next to their name.
Amex: Troubled Credit Card Company Reports $1.2bn Net Loss
On Thursday, American Express, or Amex, reported a net loss of $1,197m in the fourth quarter, the first net loss the company has experienced for 26 years.
Although the company stated that revenue from interest expenses was up 10% to $8.8bn, Amex said recent reforms to the US tax code meant the company incurred extra costs, including a repatriation cost on its foreign assets as well as a devaluation of its deferred tax assets. It estimates total costs amounted to $2.6m.
For the full year, net income was $2.7bn compared with $5.4bn the company earned in 2017. However, even with the estimated $2.6m the company claims it incurred from the recent tax charge, net earnings were still $5.3bn, $100m lower compared to last year.
In New York, American Express shares (AXP) took a near 1% tumble at the beginning of trade with shares finishing the day on $99.90. JPMorgan Chase and Goldman Sachs anticipate greater earnings for 2018.
“Overall, we believe the Tax Act will be a positive development for both the U.S. economy and American Express” said CEO and chairman Kenneth Chenault. Chenault also said he will be leaving Amex in “very strong hands” when his successor, Steve Squeri takes over next month.
American Express has suffered from an ever-reducing share in the credit card market and ended its 14-year relationship with American warehouse chain Costco who in 2016 made an agreement with the market leader, Visa.
Tencent Extends Facebook Lead
Tencent has shot past Facebook to become the world’s most valuable social network.
Editor’s Remarks: Although Tencent briefly overtook Facebook in terms of market cap in November, the recent selloff of Facebook shares prompted the Chinese tech titan to regain the lead. Facebook investors responded negatively to news that Mark Zuckerberg’s plans to highlight family and friend-based content on the newsfeed would reduce the amount of time people spent on the site. Shares in Facebook have fallen 5% since that announcement, enabling Tencent to gain a $19bn lead over the US company. Tencent’s growth has been spurred on by its diversification away from its flagship messaging app, WeChat, and into video games.
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