A great many articles have been written about mattress company Casper Sleep Inc . (NYSE:CSPR) and its disastrous IPO and for good reason. Critics have attacked the company for having no clear path to profitability, for playing at being a tech company to achieve an outsized valuation and its slowing revenue growth.
The result is that Casper slashed its initial price expectation from $18 to $12. But as MarketWatch reports, the company saw its value slide even further after a short bounce immediately after its IPO. At the time of writing, Casper has fallen into the single digits with a share value of $9.75 at the time of writing and a market cap at a little over $300 million.
Casper CEO Phillip Krim had chased a valuation of over $1 billion, and its initial IPO prospectus had indicated a value of around $700 million. These were absurd numbers, but now investors can start asking themselves whether Casper is worth it at $300 million. In order to answer that question, investors must understand the Sleep Economy, Casper’s primary means of distinguishing itself from its competitors.
Business Problems
In its SEC prospectus, Casper describes the Sleep Economy as “a rapidly growing and traditionally fragmented market” which reflects the fact that society is becoming more aware of the importance of sleep. Sleeping is not just about having the right mattresses or bedsheets but is about the sets of human behaviors and products called the Sleep Arc that helps create high-quality sleep. Casper states that its approach “is to offer products and services across the entirety of the Sleep Arc under one brand.”
Furthermore, Casper states that the global Sleep Economy represents $432 billion in 2019 and will grow at a CAGR of 6.3% to reach $585 billion by 2024. Casper only addresses $67 billion of this $432 billion market, giving it massive growth potential.But while this is a fantastic narrative, there are many issues with it. First, this massive growth potential clouds the reality that Casper is not growing rapidly enough. Casper’s revenue rose by 20% from 2018 to 2019, compared to 42% from 2017 to 2018. Revenue rose slower than its sales and marketing expenses, which helped contribute to a net loss increase from $64 million to $67 million. If growth continues to decline like this, it says something about how viable Casper truly is in this Sleep Economy.
And there is no guarantee that Casper will be the preeminent player in the Sleep Economy, as it has no moat. Casper points to its research and development capabilities as part of an effort to show that it is a tech company, but it only has one tech product on the market and there is little word on when future products will be for sale.The Sleep Economy does exist, and it is true that people across the globe are willing to spend more now to ensure a good night’s sleep. But there is little evidence or reason to suppose that Casper will be one of the winners compared to its competitors.
Comparing Valuations
The Sleep Economy example, as well as a look at Casper’s financials, shows that this is a company with a lot of issues. However, Casper’s valuation crashing to a low of $300 million does seem excessive, especially when compared with its competitors.
Casper reported a revenue of $357 million in 2018. If we assume a 20% revenue growth rate continues, we can thus expect a 2019 revenue of around $428 million. This creates a P/S ratio of 0.7. If we factor in Casper’s cash on hand and total liabilities, its enterprise value/sales ratio is closer to around 1. These are lower numbers compared to competitors such as Tempur Sealy (NYSE:TPX) and Purple Innovation (NASDAQ:PRPL), which are closer to 2.
Those two companies have financial advantages over Casper, namely the fact that they spend less on sales and marketing compared to Casper and that they are profitable. But Casper has more upside, which could make it a value investment at its current price.
Falling Too Low
I do not like Casper’s business model. It plays at being a tech company when it might as well try to be a law firm, it has no clear path to profitability, and it is in a low margin business where it is facing larger competitors. But a valuation of $300 million is still too low for this company, and there is no denying that the negative press surrounding this company has probably depressed the price.
That negative press, as well as the real problems surrounding this company, could possibly see Casper’s price tumble even further, though we should remember that this is a company that is growing by 20% and has managed to attain solid brand awareness for a mattress company. Investors may consider investing in Casper as a value stock, though its poor business model does mean there remains a solid argument in favor of ignoring this company altogether.