I called a bunch of my old friends and asked if they played the busted meal-kit IPO… they nearly laughed me off the phone. Except for one poor fellow.
Michael (name changed) likes to call himself an investor, but he admits to trading almost every day…
Now retired in his 50s, he has a regular daily routine. On June 29, Michael’s alarm went off at 6 a.m. He rode his exercise bike for 30 minutes in his modest suburban home in Dix Hills, New York. After his workout and a shower, he sipped coffee from a steaming mug on the back deck, flipped open his laptop, and started reading the market news.
Michael primarily trades stocks with his retail account. And when he opened his brokerage website, he found a message alerting him to a 1,000-share allocation of the Goldman Sachs-led initial public offering (“IPO”) of dinner-delivery service Blue Apron (APRN).
He’d never received such a large allocation before, especially for a highly anticipated deal. But as the seconds turned to minutes, he began to worry.
He started to speculate on why and how he received 1,000 shares. There must be a problem… He always put in for IPOs and typically got shut out. He received a few hundred shares here and there, but usually only for lukewarm deals. And when he flipped out of them, he was ecstatic if he made $1 on the trade.
He poured himself a second cup of coffee and wondered what he should do on the open with his 1,000 shares. Should he immediately sell? Should he buy more? Or should he hold?
Forty miles away in Midtown Manhattan, the head trader for a $500 million hedge fund was finishing up his bacon, egg, and cheese sandwich on the desk.
Luke had already Uber’ed to work, sat through his morning meeting, and fielded calls, e-mails, and instant messages to get ready for the open. His firm didn’t put in for an allocation on the Blue Apron deal, despite having a great relationship with Goldman Sachs.
The plan was to sit this one out and watch from the sidelines. But that plan changed…
A day before Blue Apron kicked off its roadshow, Amazon (AMZN) announced the purchase of Whole Foods Market (WFM) which altered the entire scope of home-delivery food service. The competition for meal-kit delivery had already been heating up… Companies like Plated, HelloFresh, and Sun Basket all offer similar business models to Blue Apron. But the Amazon news was a gamechanger… and added the risk of cheaper prices and faster delivery.
One of the worst things an investor can hear about a stock he owns is that Amazon is getting into the space. When you hear that, it’s usually time to run – run as fast as you can.
On the first day of the Blue Apron roadshow, Luke’s firm started to work on a short thesis for the IPO. They looked at revenue growth, profitability, and if Blue Apron had a real competitive advantage even with Amazon focusing more on food. Luke made calls around the Street to get a feel for how the book was shaping up.
The insight he got reaffirmed the short thesis… He learned that Goldman Sachs was having a very difficult time building a book – which simply means getting their clients to put in an indication of interest on the deal. From that alone, Luke knew to stay away. As APRN got closer and closer to opening, Luke called up a trusted no-name broker in hopes of hiding the trade from Goldman Sachs and placed an order to short 200,000 shares.
Meanwhile in Blue Apron’s Soho headquarters, emotions were mixed with fear and excitement, according to a source close to the company. There’s always optimism inside the walls of a company on the day they go public. “Lots of fingers were crossed that day,” my source said.
Originally, the IPO price range was $15-$17 a share. Then it was dramatically cut to $10-$11. This was cause for concern for some investors and employees because the company was valued at $2 billion in their last private round in 2015. The price reduction meant that it was below the old valuation and some might be underwater on their investment already. Regardless, Blue Apron moved forward with their IPO – offering 30 million shares at $10 to raise $300 million for automation and supply-chain technology.
Back in Dix Hills, Michael decided he was going to hold on to his 1,000-share position…
Although he was skittish, he figured that a Goldman Sachs-led IPO wouldn’t “break below” the deal price of $10. Typically, the lead banker does whatever it can to support their own deal. No one likes to see a failed IPO on the first day. So Michael felt somewhat comfortable holding on. And he was glad he did as he watched the first few hours of trading…
The stock rose almost 10%… at first. And then it started to sell off. But on the way down, Michael decided to double his bet – buying another 1,000 shares at around $10.50. His average on 2,000 shares was $10.25, so he believed there was only about $0.25 of risk in his trade.
Luke and his firm believed something different. Their analyst put a $5 target on the name because the top-line growth seemed to already be maturing… the unprofitable company’s costs/spending was accelerating… and of course, Amazon – Amazon – Amazon.
Over the course of the trading day, Luke’s firm shorted 200,000 shares at an average cost of $10.50. Their strategy going forward was to cover their short position starting at $7… and from there, slowly buy shares until their order was complete.
The consensus by what some people call “smart money” was almost unanimous – stay away.
Most institutional accounts, like Luke’s firm, didn’t have any interest in buying the deal at either the first ($15-$17) or second ($10-$11) price range. Some of Luke’s peers shorted the name. It was well known on the Street to not touch the deal. But not everyone shorted it because there was the issue of getting a locate to borrow the shares. And others didn’t think they could get a large enough position to move the needle for their fund.
A few weeks later, Michael is sitting on his back deck, again drinking coffee and wondering what he should do with his 2,000 shares of APRN trading around $6.
He thinks it’s too late to sell now, but he’s afraid to buy more. His losses on this one trade have wiped out his past gains on all of the IPOs that he’s received. Michael says he should have known better when he got such a large allocation, but he says he’s thankful at least he didn’t receive any shares of selfie-app maker Snap (SNAP).
Meanwhile back in Midtown, Luke says that his firm has covered about half of their position. They’re being patient on the last half… trying to buy the stock when there’s a $5 in front of the share price. And then he said: “Who knows? We might even go long the thing at $4.”
Turney Duff is a former trader at one of the biggest hedge funds in the world, the Galleon Group, where their founder and several Galleon employees were found guilty of insider trading. Turney rose through the ranks and then fell prey to the trappings of Wall Street: money, sex, drugs, alcohol, and power. Turney chronicles his spectacular rise and fall in his bestselling book, The Buy Side; A Wall Street Trader’s Tale of Spectacular Excess.