Barclays: The Biggest Reason To Like Blue Apron Is Automation

Amid a slew of sell-side coverage initiations on Blue Apron Holdings Inc APRN Monday morning, Barclays’ Ross Sandler was one of only three analysts’ to rate the company at Equal Weight.

Sandler placed a $7 price target on the stock, which had climbed over 18 percent to $7.74 by 12 p.m. ET on Monday.

Sandler noted the $1 trillion total addressable market Blue Apron stands to gain from, compared to its $1 billion annual run rate, but said his “optimism is somewhat tempered by the revenue deceleration and erosion in unit economics over the past couple quarters.”

There is also the looming threat of Amazon.com, Inc. AMZN’s meal kit service, which soft launched last week.

Opportunity In Automation

There is one major reason to like Blue Apron, according to Sandler. The company has been working to drastically improve its logistics and weekly menu selection.

Blue Apron’s business has been largely conducted manually for the past five years, but investments in logistics automation are expected to allow the company to rapidly perform its processes.

New systems will also allow subscribers to order in more flexible amounts and overall improve the company’s retention rate.

Altogether, Sandler expects the company to soon see growth accelerate and margins increase.

3 Risks To Keep An Eye On

Sandler keyed in on three risks facing the Blue Apron, with no mention of term length or near-term solutions.

Contribution profits from each order has shrunk by 66 percent, from $12 to $4, over the last four quarters. Sandler doubts this trend will turn around until the fourth quarter.

Slowing growth and increased competition from grocery companies and direct online competitors are leading to low retention rates, which are only about 10 percent after six months for the entire industry.

Amazon’s meal kit service has a wider selection, lower prices and same-day delivery through AmazonFresh, and Whole Foods Market, Inc. WFM hasn’t even been integrated yet.

Keep up with analyst coverage and the latest business news in real-time with Benzinga Pro.

Related Links:

McDonald's Preferred Over Chipotle, But Argus Still Likes The Latter Long Term

Bullish Amazon Analyst Tempers Optimism For AWS Following Channel Checks