Mad Money

Cramer tracks the destructive force threatening stocks like Blue Apron and Ulta

Key Points
  • "Mad Money" host Jim Cramer explains that while competition can be encouraging, its effect on stocks can also be unnecessarily destructive.
  • Blue Apron's IPO was a breeding ground for destructive competition, while the stock of Ulta Beauty might be faced with an unwelcome rivalry, Cramer says.
  • The market is willing to pay up for stocks without competition, but more sensitive names, even the best, are at risk, the "Mad Money" host adds.
Destructive force threatening stocks like Blue Apron and Ulta

Competition might be great for consumers, but it is awful for businesses, threatening their stock prices, profitability, and more, Jim Cramer said.

"Now, there are several different kinds of competition. There's the competition we all recognize and accept and we're cool with, where big brands try to win you over," the "Mad Money" host said, referring to iconic rivalries like Coca-Cola versus PepsiCo. "But then there's a whole different kind of competition, competition that we don't expect. I'm calling it blindside competition. And though most investors don't even realize it or understand it, this is the competition that is playing havoc with the stocks of a few very highly visible companies in this market right now."

This competition is the kind that drives stocks down even when business does not look so bad. Snap was an easy example for Cramer, who called Morgan Stanley's Tuesday downgrade of the stock an "obituary" on CNBC's "Squawk on the Street."

Since Snap's initial public offering, Facebook has relentlessly rivaled the social media company, offering free advertising spots on Instagram to companies that pay to advertise on Snap.

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Cramer tracks the destructive force threatening stocks like Blue Apron and Ulta

"One thing we all know: you cannot compete with free," Cramer said. "If you open up a lemonade stand on your corner and you're charging 25 cents per cup and then a young Mark Zuckerberg in a hoodie comes along across the street and starts giving his stuff away, you're done."

Paired with the fact that Snap's shareholders have no voting rights, the situation looks grim, especially since Snap's management does not seem eager to sell out to a larger player.

But Snap's IPO is not the only one that has been subject to ruinous competition. The stock of Blue Apron went public at a lower-than-expected price of $10, and since then, it has been sliding even further, closing at $7.14 on Tuesday.

The Amazon-Whole Foods tie-up was one threat to Blue Apron's performance; another was the crowded meal kit space, where competitors like Munchery and HelloFresh are at the company's heels.

"I don't know how you can own this stock. I can't see someone taking it over. It's just going to be a trial. Pain with no real gain in sight. I say there are easier ways to be a masochist," Cramer said.

Long-time Cramer-fave Ulta Beauty, a fast-growing name with plentiful growth opportunities and a loyal customer base, recently came under competitive fire as well, though not because its profitability is in question.

"I do not believe in any way, shape or form that Ulta's franchise is actually threatened. CEO Mary Dillon remains one of the best, if not the best, chief executives in retail," Cramer said. "Lately, though, desperate department stores have decided to cut the prices of their competing beauty products. This is a new and unwelcome development for Ulta."

Shares of Ulta declined from $314 to $256 in a surprising move for the top-performing cosmetics player, a sign that investors grew concerned about the impending competition.

Moreover, the stock trades at 30 times earnings, a lower multiple than that of companies like Facebook, which have few competitors.

"Can Ulta's stock can pull out of this tailspin? Yes, but not until it trades at a more reasonable valuation," Cramer said. "I say this because Costco traded at about 30 times earnings before Amazon bought Whole Foods and became a more direct competitor. Since then, even though it trounced estimates substantially in the last month, Costco's stock has not been able to stabilize. It now sells at 27 times earnings."

While the "Mad Money" host believes Ulta and Costco will continue to do well, he found them glaring examples of competition driving solid stocks down to level the playing field.

And while the market tends to pay up for stocks with little to no competition like Nvidia and the FANG names, Facebook, Amazon, Netflix and Google, now Alphabet, they are few and far between.

"Competition sneaks up on you. Competition is a vicious task master. If you don't see it coming, it can crush your stock and you won't know when the selling will end," Cramer said. "But take heart, at a certain point the damage from the competitors gets factored in and the pain starts to go away. However, that can take a very long time, and in some cases, please don't hold your breath."

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