While I am not an active investor in the IPO market (if the smart money is selling, why would I want to pay a premium to take stock off their hands?), I do sometimes get enticed by busted IPOs; those that were thought to be up and comers but quickly faded into the background. Casper Sleep (CSPR) seems to fit this bill and I find it to be an interesting small cap to dig deeper into.
Casper took the sleep sector by storm when it started selling mattresses through the mail in 2014. Don’t like it? Just send it back, no worries! Consumers rejoiced and sales went from zero to $100 million by year two and to $250 million by year four. As competitors emerged shortly thereafter, the company lost some of its first mover luster and by the time executives took the firm public in early 2020, investors were past the point of caring (the pandemic probably didn’t help either). After initially trying to offer shares between $17 and $19 each, Casper’s IPO priced at $12 and the stock immediately sank even further. Today you can get your hands on them for $7.50 apiece.
Okay, so why on earth would I want to spend time looking at a money-losing mattress company that has a bunch of competition and no investor interest? Well, as with most value investors, the answer probably has something to do with the price.
At $7.50 per share, the equity value is about $300 million. Despite never having been profitable, Casper is paring losses every year, with EBITDA margins of (28%) in 2017, (25%) in 2018, (18%) in 2019, and (12%) in 2020. Gross margins are around 50%, so there is no reason the company cannot reach profitability, and probably could right away if they wanted or needed to. The balance sheet is in decent shape (net cash of $23 million as of December 31st), so management’s current plan to continue shrinking losses while growing the business does not seem overly worrisome.
Meanwhile, despite their competitors Casper continues to grow revenue and expand its product lineup. Sales doubled from 2017 to 2020, to $500 million, and are expected to continue to grow in the mid teens this year. Based on current consensus forecasts, the stock fetches a forward price-to-sales ratio of less than 0.50. By my math, the bar has been set very low for this company.
Let’s assume Casper can turn profitable over the coming few years and that investors would be willing to pay 15 times earnings for the business, neither of which I think are aggressive inputs. At one-half of annual sales, the stock is pricing in a roughly 3% net profit margin at maturity, and you get any future sales growth for free. It’s hard to argue the stock is overvalued here, unless you think the business model is unsustainable or that there is no room for Casper to take share in the sleep-related markets they enter in the future.
While admittedly not the most exciting business in the world, I think their brand might be strong enough to meet or exceed Wall Street’s currently low expectations, as well as some fairly conservative assumptions I settled on. So what could the future path for the stock be?
Well, let’s say Casper meets their 2021 sales forecasts, grows those sales by 10% annually from 2022 through 2024, and reaches a 5% net profit margin in 2024. That would bring 2024 earnings to $39 million. At 15 times, the stock would essentially double from here.
And there is potentially more upside than that. What if sales exceed those levels (as millennials continue to get married and buy homes), the P/E multiple does not fetch a discount to the overall market, or a bigger player comes along and decides to buy the company outright for a nice premium?
Don’t get me wrong, this is far from a sure thing. Small caps that are losing money come with plenty of risk. But given how low expectations are and based on the current market value of the business, I think Casper might be unloved, unnoticed, and undervalued as a result, which means it’s worth watching.