Free Actionable Writeup - HelloFresh: A Deep Value Opportunity with Massive Upside Potential from Factor75 and RTE Segment Growth

A Peter Lynch-style brand with a Joel Greenblatt hidden gem, all at Walter Schloss bargain prices

HelloFresh SE: A Deep Value Play with Explosive Growth Potential in the RTE Market

Reminder: Not Financial Advice, do your own Due Diligence

It’s rare to find an investment opportunity that combines the growth potential and brand familiarity of a Peter Lynch-style pick with Joel Greenblatt’s approach of uncovering undervalued segments within companies, such as spinoffs, that the market hasn’t fully recognized at Walter Schloss prices. This blend offers the potential for growth while capitalizing on mispriced assets. I believe HelloFresh represents an opportunity like the above.

TLDR: HelloFresh (HFG) is trading at <0.2x sales, a valuation typically associated with bankruptcy, despite generating €6 billion in steady-state revenue with 12-14% EBITDA margins in its meal kit business. Additionally, its rapidly growing Ready-To-Eat (RTE) segment, led by Factor75, is bringing in €2 billion in revenue, growing at 50% YoY, with similar 12-14% EBITDA margin projections. The company has little net debt, making this valuation a clear disconnect from its true potential.

Price Target: $71 (8-bagger)

At a target price of $71 per share, the company is projected to achieve steady-state EBITDA margins of 14%, with combined projected future revenues of $12 billion from ($6 BLN today) Hello Fresh and Factor ($2 BLN today and growing fast). This results in an EBITDA of $840 million. Applying a 10x EV/EBITDA multiple, the enterprise value reaches $8.4 billion. Given 167 million shares outstanding, the implied market capitalization aligns with the $71 per share target. Starting from an initial share price of $8.50, this represents a multiple on invested capital (MOIC) of approximately 8x.

Feel free to skip to the conclusion for a longer TLDR.

Thesis:

HelloFresh SE (HFG) is significantly undervalued, trading at just 0.2x sales, which reflects a distressed valuation disconnected from its strong operational performance and growth potential. The market has failed to recognize the true value of Factor75, HelloFresh’s rapidly expanding Ready-To-Eat (RTE) segment, which has grown at 45% YoY since its 2020 acquisition and is projected to generate over €2 billion in revenue by 2024. Despite this growth, the market assigns little value to Factor75, while competitors like Domino’s (3.8x sales) and Instacart (2.4x sales) trade at much higher multiples.

This disparity presents a significant re-rating opportunity, especially considering that even Blue Apron, a struggling competitor, sold its assets for 0.3x sales, higher than HelloFresh’s current multiple. A conservative valuation of 2x sales for Factor75 alone suggests it could be worth at least twice HelloFresh’s current market cap. As HelloFresh shifts focus to more profitable, high-LTV customers and improves operational efficiency, it is well-positioned for sustainable growth in both its meal kit and RTE businesses.

Operational Strengths of HelloFresh: The Backbone of Growth and Efficiency

HelloFresh's operational strengths lie at the heart of its ability to scale rapidly, efficiently manage a complex global supply chain, and drive profitability even in competitive markets. These strengths not only differentiate HelloFresh from competitors but also position it to capitalize on growth in new verticals like Ready-To-Eat (RTE) meals through Factor75.

1. Best-in-Class Global Supply Chain Management

HelloFresh manages one of the most sophisticated supply chains in the world, enabling it to deliver fresh, perishable ingredients and pre-prepared meals to millions of customers weekly. What sets HelloFresh apart is its remarkable efficiency in reducing food waste. The company has achieved a 1% wastage rate for perishable goods, compared to the global average wastage rate of 70% in similar industries​(HelloFresh). This near-zero wastage is a testament to its tightly managed logistics, temperature-controlled environments, and rapid turnover of inventory.

In addition to minimizing waste, HelloFresh is able to optimize procurement by leveraging its scale to negotiate favorable terms with suppliers. This procurement efficiency reduces the cost per unit and allows HelloFresh to offer competitive pricing without compromising margins. The company also constantly upgrades its fulfillment and production centers to increase automation and reduce labor costs. This scalability is further enhanced by HelloFresh’s investments in new fulfillment centers, including expansions in both the U.S. and Europe, ensuring they can serve growing customer demand​(FreshPlaza)​(Investing.com). They are also not afraid to get lean and shut down inefficient/unneeded operations. (GroceryDive)

2. Scalability of Operations

A critical element of HelloFresh’s operational strength is its ability to scale new business verticals at a minimal incremental cost. This is evident in the speed with which HelloFresh scaled Factor75, its RTE business. It took the company seven years to scale the meal kit business to €1 billion in annual revenue, but Factor75 achieved that in just three years​ (Investing.com). This rapid scaling of Factor75 demonstrates how HelloFresh’s core logistics, procurement, marketing, and technology infrastructure can support growth across multiple product categories and geographies without proportionate increases in operational complexity.

As HelloFresh continues to expand its portfolio across brands like Green Chef, Every Plate, Pet's Table, and Good Chop, along with ancillary offerings such as supplements and fresh juice delivery, I anticipate the company will grow these segments at a steady and sustainable rate. These diverse product lines not only cater to different customer preferences and dietary needs but also allow HelloFresh to tap into new markets and revenue streams, contributing to long-term growth across both its core and ancillary businesses.

3. Data-Driven Marketing and Customer Acquisition

HelloFresh’s ability to acquire and retain customers efficiently is driven by its sophisticated data analytics and marketing capabilities. The company utilizes a proprietary internal marketing platform that enables it to target the right customers at the right time, optimizing for lifetime value (LTV). This level of precision is essential for a subscription-based business like HelloFresh, where customer acquisition costs (CAC) need to be justified by strong retention rates and high LTV. Despite challenges around customer churn, particularly in the meal kit segment, HelloFresh’s data-driven approach allows it to continually refine its marketing strategy and focus on higher-quality, more profitable customers.

This data-centric approach also informs the company's menu and service offerings. HelloFresh regularly adjusts its menus based on customer preferences, dietary trends, and local market demands. By expanding its weekly menu offerings from six recipes in 2016 to 45 recipes by 2023, the company provides flexibility and customization options that cater to a broad range of customer needs. This adaptability enhances customer satisfaction and retention by ensuring that HelloFresh’s offerings evolve alongside consumer preferences ​(Investing.com).

4. Environmental Sustainability and Corporate Responsibility

Another strength that differentiates HelloFresh from competitors is its commitment to sustainability and environmental impact reduction. The company has implemented a number of initiatives to reduce its carbon footprint, including carbon-neutral meal deliveries and investments in eco-friendly packaging. By sourcing ingredients locally where possible and reducing transportation distances, HelloFresh further minimizes its environmental impact​ (HelloFresh).

5. Leveraging Economies of Scale

As HelloFresh continues to expand both its meal kit and RTE verticals, the company benefits from economies of scale, which allow it to further reduce costs. Increased bargaining power with suppliers, larger procurement orders, and higher volume processing through fulfillment centers enable HelloFresh to lower the cost per meal. This creates a virtuous cycle where higher volumes lead to better pricing, which can then be passed on to customers in the form of competitive pricing, driving further growth​ (HelloFresh).

Factor75 and RTE: The Crown Jewel of HelloFresh's Future

Factor75, acquired by HelloFresh in 2020 for $277 million, has rapidly become a core growth engine for the company. Starting with €93 million in revenue in 2020, Factor75 is projected to exceed €2 billion in revenue by 2024, reflecting a CAGR of 87%. This growth underscores the massive potential of the Ready-To-Eat (RTE) market and HelloFresh’s ability to successfully scale new verticals.

Factor75 capitalizes on rising demand for convenient, healthy, ready-to-eat meals, offering chef-prepared, nutrition-focused options (keto, paleo, low-carb) that appeal to health-conscious, time-strapped consumers. Its success in the U.S. has laid the groundwork for further expansion into Canada, Australia, and Europe, making it a key player in the global RTE market.

HelloFresh’s operational strengths, including its logistics and distribution, have fueled Factor75’s rapid growth and position it to continue scaling globally. With this trajectory, Factor75 could soon become a major driver of revenue not only in the U.S. but in the global food delivery market as well.

Profitability and Free Cash Flow: Converting Growth into Returns

As of Q2 2024, HelloFresh posted an adjusted EBITDA margin of 7.5%, reflecting steady profitability amid macroeconomic challenges and the growth of its Ready-To-Eat (RTE) segment. Factor75, a key contributor, saw a 45% year-over-year revenue increase. Currently at 4% EBITDA margin, Factor75 is projected to hit 12-14% long-term, driven by operational efficiencies, lower procurement costs, and increased automation.

However, HelloFresh’s meal kit business faces challenges from high customer churn and acquisition costs, alongside inflationary pressures that have raised procurement and fulfillment expenses. To mitigate this, the company is focusing on higher-value customers to boost retention and reduce churn, improving profitability across both meal kits and RTE offerings.

Shifting Customer Strategy: Focusing on Quality Over Scale

One of the critical challenges HelloFresh has faced in recent years is managing high customer churn rates, especially in its core meal kit business. Historically, the company has prioritized growth through aggressive customer acquisition, which led to a significant increase in subscribers during the pandemic. However, as the market for meal kits matured and pandemic-driven demand waned, HelloFresh struggled with retention. Reports show that only 10% of customers remain subscribed after 11 months, significantly increasing customer acquisition costs (CAC) and impacting profitability.

Recognizing these challenges, HelloFresh has pivoted its customer strategy. Rather than focusing solely on rapid customer growth through discount-driven acquisition, the company is now targeting higher-quality customers—those who are more likely to stay subscribed for the long term and provide higher lifetime value (LTV). This shift toward a more sustainable customer base is key to reducing churn and improving overall profitability.

Acquisition vs. Retention: The Cost of Growth

HelloFresh's previous strategy of acquiring customers at scale was successful in driving top-line revenue growth, but it came with high costs. The company often relied on heavy promotional discounts to attract new customers, which led to a surge in subscribers but did not necessarily translate into long-term retention. Many customers would subscribe to take advantage of discounts but cancel once the full price resumed, leading to high turnover and low LTV for these cohorts. This practice significantly inflated HelloFresh’s customer acquisition costs, hurting margins.

In response, HelloFresh has begun shifting its marketing approach. Rather than offering deep discounts to acquire as many customers as possible, the company is focusing on attracting customers who value convenience, quality, and sustainability—those less likely to churn after a few months. The emphasis is on providing value beyond price, such as offering a personalized experience and catering to specific dietary preferences (vegetarian, keto, paleo, etc.), which resonate with higher-quality, more loyal customers.

Targeting Higher-LTV Customers

The shift to focusing on higher-LTV customers is evident in HelloFresh’s strategic initiatives. These include expanding its menu offerings, launching new meal options in both the Ready-To-Eat (RTE) and meal kit segments, and further integrating data-driven customization into its service. By offering a broader range of meals and tailoring options to individual preferences, HelloFresh can increase customer satisfaction and, importantly, engagement, making it more likely that subscribers will continue using the service long-term.

For example, the company's RTE service, led by Factor75, is increasingly targeting busy professionals and families who are willing to pay for the convenience of high-quality, chef-prepared meals that require no cooking. This group values the time saved and the ease of meal preparation, making them more likely to stay subscribed than customers who see meal kits as a temporary solution or novelty. As a result, Factor75 boasts higher retention rates compared to the traditional meal kit business.

Additionally, HelloFresh has invested in enhancing the user experience by making its digital platforms more interactive and engaging. Personalized recommendations, based on past orders and preferences, make the service feel more tailored to individual needs. This enhances the perceived value and encourages longer-term subscriptions. This customization effort is crucial for maintaining brand loyalty, as customers feel the service is uniquely suited to their lifestyles.

Macro Risks and External Factors: Navigating Competition and Market Dynamics

HelloFresh operates in a rapidly evolving market where macroeconomic pressures, external competition, and shifting consumer behaviors pose both challenges and opportunities. While the company has carved out a strong position in the meal kit and Ready-To-Eat (RTE) sectors, it faces various risks that could impact its growth and profitability in the coming years.

Inflation and Rising Costs

One of the primary external risks is inflation, which has significantly increased the cost of ingredients, packaging, and labor. While HelloFresh has implemented strategies to pass some of these costs onto consumers, inflation has pressured its margins, especially as the company works to balance pricing with customer retention. Additionally, rising fuel and transportation costs, as well as the higher cost of sourcing sustainable ingredients, could further squeeze profitability unless operational efficiencies are continually improved. This challenge is especially relevant given HelloFresh's focus on eco-friendly packaging and sustainable sourcing, which, while appealing to environmentally conscious consumers, adds a layer of complexity to cost management.

Competitive Landscape: Increasing Pressure from RTE Players

The RTE market is becoming increasingly competitive, with new players entering the space, each offering differentiated products and services. Among the most prominent competitors is CookUnity, a chef-driven meal service that provides restaurant-quality, fully prepared meals directly to consumers. CookUnity differentiates itself through its collaboration with renowned chefs, offering a wide array of gourmet dishes and creative, globally inspired meals that cater to various dietary preferences, including keto, paleo, gluten-free, and vegan options. This unique positioning gives CookUnity an edge in the premium segment, attracting foodies and health-conscious consumers willing to pay a premium for high-quality meals​.

CookUnity’s competitive pricing also poses a challenge. It offers meals starting at around $11.09 per meal for larger plans, which is comparable to Factor75’s price point, but with the added value of chef-driven menus and diverse meal options. Furthermore, CookUnity has focused on a regional model, with menus tailored to specific areas like the East Coast, West Coast, Texas, and the Midwest, ensuring that customers receive fresh, locally sourced meals​(Several.com). This localized approach could present a challenge for HelloFresh as it attempts to scale Factor75’s RTE service across the U.S. and internationally.

Other competitors like Sun Basket and Blue Apron also continue to innovate within the meal kit and RTE sectors, adding pressure on HelloFresh to maintain its market leadership. Sun Basket, for instance, focuses on delivering organic ingredients and customizable meal plans designed for health-conscious consumers, while Blue Apron emphasizes convenience and flexible pricing options to cater to a broader audience. Both competitors have strong brand recognition and customer bases that could erode HelloFresh’s market share if the company does not continue to innovate.

Valuation: A Significant Disconnect from Reality

HelloFresh is currently undervalued by any reasonable metric, particularly when considering the growth of its Ready-To-Eat (RTE) vertical, led by Factor75. At its current trading price, the market is pricing HelloFresh as if it were a distressed company, trading at 0.2x sales, which significantly undervalues both the core meal kit business and the rapidly expanding RTE segment. This disconnect from the company’s true value presents a compelling opportunity for long-term investors, as a re-rating of the stock could lead to significant upside.

Factor75: The Core Driver of Value

The most substantial upside for HelloFresh comes from Factor75, which has quickly become the company's crown jewel. Factor75, acquired in 2020 for $277 million, is projected to generate €2 billion in revenue by the end of 2024, growing at an impressive 45% year-over-year (YoY)​.

Using these multiples as a benchmark, Factor75 alone could be worth between €2 billion to €3 billion on a standalone basis. Even under conservative assumptions, valuing Factor75 at 1x sales would imply a valuation of €2.2 billion, which implies a 40% upside from here.

Valuation Multiples and Market Comparisons

HelloFresh is significantly undervalued on a relative basis. If the market were to assign even a 1x sales multiple to HelloFresh’s overall business, its valuation would approach €7-8 billion, reflecting a substantial upside from its current market cap. However, if the market assigns a 2-3x sales multiple to the rapidly growing Factor75 segment, a more realistic valuation would be in the €4-6 billion range for that business alone, suggesting multi-bagger returns for investors​.

Adjusted EBITDA and Free Cash Flow Support Valuation

In addition to sales multiples, HelloFresh’s adjusted EBITDA and free cash flow provide further support for a higher valuation. The company generated €57 million in free cash flow in Q2 2024 and expects to produce €350-400 million in adjusted EBITDA for the full year​. This free cash flow, coupled with the projected 12-14% long-term EBITDA margins for Factor75, indicates that HelloFresh is on a clear path to profitability and cash generation.

Adjusted EBITDA multiples for food and delivery companies typically range from 8-15x depending on growth rates and profitability. Applying a 10x EBITDA multiple to HelloFresh’s projected €350-400 million in adjusted EBITDA would suggest a valuation range of €3.5-4 billion—again, a substantial premium to the current market cap.

Cash Reserves and Liquidity: Strengthening the Balance Sheet

In terms of liquidity, HelloFresh has taken proactive steps to ensure financial flexibility. The company recently secured a €190 million term loan to provide additional liquidity for future growth initiatives​. With €224 million in cash reserves and a strong free cash flow profile, HelloFresh is well-positioned to weather any short-term macroeconomic headwinds while continuing to invest in its growing RTE segment​.

Sum-of-the-Parts Valuation: Unlocking Hidden Value

To gain a clearer picture of HelloFresh's full potential, a sum-of-the-parts (SOTP) valuation can be applied:

• Factor75 (RTE segment): Even with conservative assumptions, this business could be valued between €2-3 billion based on its rapid growth and projected 12-14% EBITDA margins.

• Meal Kit Business: While growth has slowed, the meal kit segment remains profitable, generating stable cash flow. Applying a 0.7-1x sales multiple to the meal kit segment’s projected 2024 revenues (~€4-5 billion), we get a valuation of €3-5 billion.

• Net Cash and Cash Equivalents: HelloFresh’s cash position further bolsters the valuation by around €190 million.

In total, this SOTP analysis suggests that HelloFresh could be worth between €5.5 billion to €8 billion on a combined basis, which represents a substantial upside from the current valuation.

Catalysts for Valuation Re-Rating

Several potential catalysts could lead to a re-rating of HelloFresh’s valuation:

1. Improved Profitability: As Factor75 scales and achieves higher EBITDA margins, the market may begin to recognize the true value of the RTE business.

2. International Expansion: Expanding Factor75 into new markets, such as Canada, Australia, and Europe, could drive further revenue growth and increase the overall valuation​.

3. Strategic Partnerships or M&A Activity: Given Factor75’s rapid growth and unique positioning in the RTE market, it could become an attractive acquisition target for larger food or technology companies looking to enter the space.

4. Other Bets: As the company makes other strategic bets in supplements, fresh juice and meat delivery the company may grow organically in other business segments as well.

Conclusion: A Compelling Deep-Value Opportunity in the Making

HelloFresh presents a highly compelling deep-value investment with significant upside potential, driven primarily by the underappreciated value of its Ready-To-Eat (RTE) segment led by Factor75. The current market valuation, which prices HelloFresh at 0.2x sales, implies a business in distress—yet nothing could be further from the truth. The company's operational strengths, coupled with the explosive growth of Factor75, paint a much brighter picture.

At the heart of HelloFresh's future is Factor75, which has rapidly scaled to become the company's primary growth engine. Projected to generate €2 billion in revenue by 2024, Factor75 is positioned to dominate the growing RTE market. Despite this, Factor75 alone is currently undervalued by the market, with a standalone value that could be two times HelloFresh's current market capitalization. This significant undervaluation provides a clear margin of safety for investors, as the market has yet to fully recognize the value of Factor75 and its long-term profitability potential, especially as it expands internationally.

In addition to Factor75, HelloFresh’s core meal kit business, though mature, remains profitable and provides a steady cash flow base for the company. HelloFresh has been successful in optimizing its supply chain, reducing waste to an impressive 1%, and leveraging its global logistical infrastructure to scale both the meal kit and RTE businesses efficiently​. Furthermore, HelloFresh’s focus on high-quality customer acquisition, particularly through more personalized and flexible offerings, has the potential to improve customer retention and drive long-term profitability.

Despite short-term challenges, including rising inflation, logistical bottlenecks, and heightened competition from companies like CookUnity and Sun Basket, HelloFresh is well-positioned to navigate these risks. Its investments in automation, supply chain efficiency, and customer engagement are crucial components in mitigating these threats. Recent Insider purchases by the CEO Dominik Richter, of approx 1% of the business ($11M USD) give us further confirmation that the business is undervalued.

In terms of valuation, the potential upside is immense. With Factor75’s explosive growth, HelloFresh could see a multiple expansion as the market begins to appreciate the true value of its RTE business. A sum-of-the-parts (SOTP) valuation places the company's potential value between €5.5 billion to €8 billion, significantly higher than the current market cap. (4 bagger - 300% upside)

For long-term investors, HelloFresh represents an asymmetric risk-reward opportunity. The downside is limited by the company’s strong operational backbone and consistent free cash flow generation, while the upside could be substantial if Factor75 continues to scale and improve profitability. As HelloFresh expands into new markets and improves its customer retention metrics, a re-rating of the stock is highly likely, offering investors the potential for multi-bagger returns in the years to come.

In summary, HelloFresh is a rare opportunity where the market’s short-term pessimism has created an attractive entry point for investors with a long-term view. One can buy a household brand(Peter Lynch) but take advantage of the hidden business (Joel Greenblatt) at dirt cheap prices (Walter Schloss). As the company continues to unlock value from Factor75 and optimize its operations, the stock has the potential for a significant re-rating, making HelloFresh a top candidate for value investors looking for substantial upside in the evolving food delivery market.

Disclaimer

Disclosure: I hold a long position in HelloFresh and believe the stock is significantly undervalued based on the underlying growth potential of its RTE business.

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