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Motley Fool Issues Rare “All In” Buy Alert

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Shares of Blue Apron Holdings (APRN -9.16% ) soared as much as 38.1% this week, according to data from S&P Global Market Intelligence. Without any official news releases from the company, it is hard to say what drove up Blue Apron's stock price. However, with high short interest and the resurgence of the meme stock craze, it is possible that a short squeeze caused Blue Apron's shares to rocket violently higher. As of 12:46 p.m. ET on Friday, the stock is up 34.1% since last Friday's close.

Blue Apron didn't publish any official news or major filings with the Securities and Exchange Commission (SEC) this week, so investors were not reacting to any fundamental changes to the underlying business. So what caused this huge price bump? It is most likely the market dynamics of a highly shorted security.

According to Yahoo! Finance, approximately 23% of Blue Apron's float (shares that are publicly traded) were sold short as of the end of July. If a heavily shorted stock starts to trade higher, these short-sellers will typically get out of their trades to avoid major losses. To get out of a trade, short-sellers are required to buy back the shares they sold short, which can create even more upward pressure on a stock price.

This is the definition of a short squeeze, a strange stock market phenomenon that has seen huge interest lately with the crazy price movements in meme stocks. Blue Apron stock has all the ingredients for a short squeeze right now.

It may be fun to watch Blue Apron's stock trade wildly, but this is a business long-term investors should avoid. Judging by the company's earnings released last week, this meal kit company is not in great shape. From the second quarter of 2021 to Q2 2022, total orders on Blue Apron fell from 1.98 million to 1.7 million and total customers fell from 375,000 to 349,000. Clearly, the meal kit company is not able to retain its customer base.

Revenue didn't look that bad, up 6% from the first quarter and flat year over year, but that is because there was a huge bulk order from an enterprise customer. Free cash flow from the first six months of 2022 was negative $50 million, which shows how unprofitable this meal kit business is. With only $54 million in cash on the balance sheet, Blue Apron is going to have to raise funds from the capital markets, further diluting or indebting its shareholder base. With a business not growing much, if at all, this is not a recipe for good returns over the long haul.  

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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