It seems there is a limit to what investors are willing to pay for fast-growing companies.
For a while I wasn't so sure. Just about any tech company that was growing fast -- no matter the cost to achieve that growth -- was able to get its initial public offering off the ground at a relatively rich valuation. It was understandable. Growth is in -- or it has been until investors started panicking a bit about tech stock valuations -- and it seemed investors were desperate to own a piece of fast-growing companies as they started life on public stock markets.
And then Wednesday, we found the exception to the rule. Blue Apron Holdings Inc., the startup that delivers boxes of ingredients to cook meals, slashed the proposed price for its IPO shares just about 12 hours before it plans to sell its first batch of stock to the public. From a proposed range of $15 to $17 a share about 10 days ago, Blue Apron is now pitching its shares at $10 to $11 each.
That scale of discount is unusual just before a relatively brand-name IPO, and it's not a great sign for Blue Apron. Potential IPO investors clearly balked at paying what would have been up to four times its trailing 12-month revenue excluding customer discounts and credits. At $11 a share, Blue Apron would be valued at about 2.5 times its net revenue over the last year -- a discount to e-commerce companies.
I don't know what happened. Blue Apron has red flags for sure. In the last 12 months, it paid more than one-fifth of its net revenue in marketing to keep customers coming in the door, and a worrying share of customers stopped ordering their meal kits after trying them for a while. Plus Amazon.com Inc. just sent a $13.7 billion signal that it wants to grab a bigger slice of Americans' meal budgets.
But Snapchat and Okta and other young, fast-growing tech companies that went public this year had red flags, too, and nevertheless didn't have too much trouble launching IPOs at fairly rich valuations. Perhaps potential stock investors simply didn't think Blue Apron was worth rolling the dice for a shot at continued growth.
Just one data point: At its initial IPO price range Blue Apron could have started public life with a higher stock multiple than Amazon, which trades at 3.3 times its trailing 12-month sales. Yes, Blue Apron's net revenue more than doubled in 2016 and Amazon's did not. But c'mon. Blue Apron could die, and Amazon is a big, growing and ambitious beast operating in some of the most essential categories of business and consumer spending.
Or maybe this isn't just about Blue Apron but a signal that broader doubts have crept in about the wisdom of fairly full valuations for untested companies. I assume Spotify is watching. It's another fast-growing company with many red flags that is hoping to go public at a rich valuation.
Blue Apron could do just fine at its chopped price. But for a day at least, we know stock investors looked at a company with steep sales growth and said "no mas."
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
These Blue Apron valuations are based on the company's total shares outstanding including the 30 million shares it plans to sell in the IPO and previously issued employee stock options.
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Daniel Niemi at firstname.lastname@example.org