Shares in Marley Spoon AG (ASX: MMM) may just be some of the most beat-up shares on the ASX at the moment. In less than one month, shares have fallen around 40% and currently trade at $2.09 at the time of writing.
Is this a buying opportunity or will the share price plummet further?
What does Marley Spoon do?
Marley Spoon is a global subscription-based meal kit service that operates in Australia, the United States and Europe. Its meal kits contain step-by-step recipes that are pre-portioned with ingredients that cater to the more health-conscious consumer.
Recent share price movements
Shareholders in Marley Spoon have had a wild year so far.
The intuition as to why the company experienced record growth in its second quarter of 2020 is fairly straight forward: lockdowns and a global pandemic all of a sudden made going to the local supermarket pretty unappealing. Home delivered meal kits were the solution for many households, causing a huge increase in demand which Marley Spoon could cash in on.
Some of the numbers out of the Q2 results were impressive. Quarterly revenue was up 129%, it achieved its first positive EBITDA of €4.5, and its full-year revenue growth guidance got upgraded to 70% (from 30%). Keep in mind these numbers were coming off a pretty small base, but still impressive nonetheless.
When did it all go wrong for MMM shares?
The Marley Spoon share price started heading south when the company released its Q3 results this year. While the numbers did indicate some significant growth, the quarterly growth figures only really looked impressive when they were compared to the prior corresponding period of Q3FY19, which again, came off a really small base.
When the Q3 results were compared to the Q2 results, revenue had actually fallen, EBITDA had dropped right back to just €0.4 million and the company finished the quarter with an operating cash flow of -€1.3 million.
To make matters worse, the share price fell an additional 22% at the start of this week following the announcement of a potential Covid-19 vaccine. The intuition makes sense to me here: if the company struggled to grow its numbers on a quarterly basis under optimal conditions where people were stuck at home, how will it be able to improve when the economy is running normally?
I would note that a vaccine might be still some time away for now, so whether a sell-off of this extent was justified or not is another question altogether.
Some of my thoughts
I think that Covid-19 has presented a situation in which there have been temporary winners and losers, with Marley Spoon coming under the former category, in my opinion. It’s important to note that prior to Covid-19, under better economic conditions, the company’s financial position was less than ideal and it hasn’t been profitable for the last 6 years.
With the recent influx of active customers and sales growth, you’d pretty much have to be banking on the fact that many of these new customers will be sticky and are going to continue to be a buyer of its products as the economy returns to normal.
I’m of the opinion that these customers aren’t likely to stick around for the long-term, for a couple of reasons.
Firstly, supermarkets that dominate the market are in that position for a reason, it’s definitely the preferred option around the world. It would seem unlikely to me that a global pandemic would permanently change the way in which consumers get their groceries.
Secondly, I just don’t think that Marley Spoon has much of a competitive advantage over any of its rivals in this space. Some of its competitors such as Hello Fresh offer the same pre-portioned meal kits that seem to want to fall under the “healthy” category.
There’s no differentiation between these products in my eyes, and therefore all it’s going to take is another competitor to come along with a better idea to move customers away from their current meal kit providers.
Buy/hold/sell?
I am not a buyer or a holder of MMM shares at these levels given the challenges that I think this company is up for in the future.
Remember that you’ve got a choice between investing in companies with certain factors working for them, and things working against them. I think Marley Spoon is the latter case here, and there are other stocks that are more likely to benefit from a gradually reopening of the economy.
If you’re looking for a way to play the Covid recovery, click here for my favourite 3 stocks on the ASX right now.