Description

While the Blue Apron IPO was a bust, it would be inappropriate to assume that the meal kit industry is destined to be unprofitable and controlled by Amazon. If we look at the data, Blue Apron went public losing over $54m annually with a $1.6B valuation and tried to raise $3B in additional capital at the IPO, which is a highly unusual and flawed IPO strategy. It is no wonder that the market has heavily discounted the company’s valuation since the IPO given that the company spends nearly 50% of revenue on sales and marketing and is not expected to turn a profit for 5 years or until 2022. From the data we have analyzed, it looks as if Blue Apron is currently spending $100 in customer acquisition costs and the current lifetime value of a customer is approximately $270. While the ratio is decent, it is certainly not best in class among direct to consumer subscription revenue businesses.

While we initially had some skepticism regarding the meal kit industry given Blue Apron’s less than impressive CAC/LTV ratio and the highly competitive U.S. market, we were pleasantly surprised when we recently stumbled across GoodFood.  GoodFood (FOOD) is a meal kit subscription service business based in Montreal that has off the charts business metrics. Not only is the company growing 1000 percent, but it is expected to turn profitable on a cash flow basis in 2018 when it scales to $100m plus in revenues. Yes, at $100m in revenues, this meal kit company will be profitable! Blue Apron won’t achieve profitability before it reaches $1.8B in revenue. GoodFood is unique in that its customer lifetime value is over $400 in gross profit and tracking to $600 in in 2018 as gross margins improve, while keeping CAC between $70-$78. Blue Apron’s CAC is north of $100 and its growth rate is under 30 percent and its gross profit LTV is under $300.

What makes GoodFood unique is that the Canadian market has less competition (Chef’s Plate) and GoodFood has 40% market share.  In addition, marketing and advertising costs are substantially lower in Canada. In addition, GoodFood has gotten far greater customer retention and density by focusing its marketing efforts on fewer cities in growing its brand. In addition, Canada has less restaurants, longer winters and further travel distances for consumers thus giving the meal kit industry a greater differentiating value proposition in the Canadian market.

An interesting contrast between Blue Apron and GoodFood is that Blue Apron went public at $1B in revenue and GoodFood went public at $7m in revenue. The VC investors in Blue Apron reaped the benefits of their high growth, while GoodFood public investors have the opportunity to earn very high returns as the company scales to $300m in revenue over the next 2-3 years. We have modeled that GoodFood will generate $125m in sales and $.20 per share in EBITDA in 2018 and $220m and $.45 in EBITDA per share in 2019 and $310m and $.70 per share in EBITDA in 2020. We believe the company should trade at 3-4x sales and 15-25x EBITDA given the exceptional growth rate and profitability of the model. While skepticism will abound and the shares will trade at a heavy discount until the company achieves profitability, we believe that that if the company executes, we could be looking at a $15 plus stock in 3 years, which would would yield an extraordinary return from today’s level. Even if the market decides to discount our valuation metrics, there is little doubt that the company could be worth 5-10x with simple execution.

If we look at the comp table below, GoodFood exhibits the highest ROI (CAC/LTV), the highest growth and the lowest marketing spend as a percentage of revenue of all the direct to consumer companies listed. GoodFood is spending less than 20% of revenues on sales and marketing while Blue Apron spends almost 50% and Care.com, Nutrisystems, and Match Group all spend between 30-40% on sales and marketing.  We expect sell side coverage from both Canadian and U.S. brokerage firms to commence soon and we also expect the company to start providing the investor community with more metrics on which the company should be measured and spend more time outreaching to new prospective investors, which we believe will help drive a better valuation for the company.

It is also important to note that Amazon Fresh does not operate in Canada. The Canadian meal kit market is only $65m today and while it is expected to grow to $3B within 5 years, it is really not large enough to move the needle for a huge company such as Amazon, which will concentrate its early efforts on the major cities in the U.S.  In addition, Blue Apron also does not service the Canadian market.

So in sum, we think GoodFood presents an extraordinary opportunity and is incredibly undervalued at 6x 2018 EV/EBITDA. The company has a long uninterrupted runway for growth in the Canadian market. In fact, we can’t find another company that is projected to grow over 300% in 2018, while being profitable and spending less than 25 percent of revenue on sales and marketing, while trading at a 1/3 to 1/10 of the value of its peers on a forward EV/EBITDA basis.

Additional private comps and recent M&A multiples for direct to consumer companies

·      BamTech

o   August 2016, Disney acquires 33 percent stake in BamTech valuing company at 10x P/S

o   ARPU $79 per year

o   Valued at $3B

·      LifeLock

o   Symantec acquired company in 11/16 for 44.7x EV/EBITDA and 3.5x P/S

o   Total purchase price: $2.3B

o   ARPU $95 per year

·      Lynda

o   LinkedIn paid 10x P/S or $1.5B in 4/15

o   ARPU $375 a year

·      Udacity

o   Raised $100m in 2016 at $1B valuation at 30x sales

Catalyst

• GoodFood (FOOD) is growing 1000 percent and is expected to turn profitable on a cash flow basis in 2018 when it scales to $100m plus in revenues

• GoodFood is unique in that its customer lifetime value is over $400 in gross profit and tracking to $600 in in 2018 as gross margins improve, while keeping CAC between $70-$78  

• Blue Apron’s CAC is north of $100 and its growth rate is under 30 percent and its gross profit LTV is under $300

• What makes GoodFood unique is that the Canadian market has less competition (Chef’s Plate) and GoodFood has 40% market share