When individual stocks struggle, it can be a painful, drawn-out process. Blue Apron (NYSE: APRN) has been a good example of what can happen when newly public companies aren't as successful as many anticipate, as the meal-kit company has lost more than 90% of its value since its IPO just two years ago.
Last week, Blue Apron announced that it would do a 1-for-15 reverse split of its stock. Many saw the move as a last-ditch effort to try to keep the business viable, as its stock price had fallen to $0.55 and the company was in danger of losing its right to keep its shares listed on the New York Stock Exchange.
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Why a reverse split makes sense
Reverse splits are a way for companies to get their share prices back up to more reasonable levels. In Blue Apron's case, by having investors trade 15 old shares for each new share, the company will reduce its share count from 100 million to less than 7 million, but each of the shares will be worth roughly 15 times more. That's consistent with how the stock opened following the effective date of the reverse split, as Blue Apron opened Monday morning at $8.25 per share -- exactly 15 times the $0.55-per-share closing price the Friday before.
What happens in the long run, though, can vary. In many cases, a renewed higher share price only makes it easier for bearish investors to bet against the company, and the stock continues its decline. However, for a select handful of stocks, a reverse split has bought companies the time they need to mount a full recovery.
Each reverse split involves a story. For Booking Holdings (NASDAQ: BKNG), the 1-for-6 reverse split gave the online travel specialist the chance to move forward and take a leadership role in the then-budding industry, and its huge gains since then are a testament to the best-case scenario for reverse splits. Similarly, Laboratory Corporation of America (NYSE: LH) and CoreCivic (NYSE: CXW) both resorted to 1-for-10 reverse splits in the early 2000s, and both have seen strong returns and become key players in their respective industries.
Blue Apron will face an uphill battle to join these reverse-split winners. A recovery isn't out of the question, but it'll take quick and decisive action to overcome the many hurdles standing in Blue Apron's way.
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