CafePress (CPRS) allows consumers to customize and make a wide range of products like t-shirts, mugs, water bottles, etc. In the past few years the company has focused more on developing their own technology and moving away from the commoditized space of corporate promotional items into the consumer segment where they can capitalize in a market that is less price sensitive. We see this whole market is an important consumer trend and CafePress certainly has an opportunity to emerge as one of the leaders. The company is offering few shares in the IPO and even after the offering the total shares outstanding will be fairly low. Our intrinsic value of $30 supports strong pricing and aftermarket trading.
POSITIVES, NEUTRALS AND NEGATIVES
+CafePress has carved out a niche with consumers who want an easy way to get a personalized product in low volumes. There are many alternatives but CafePress has built front-end systems to make it easy.
+ The company has invested in technology and a more diverse product line to differentiate them from mak-ers of t-shirts and mouse pads. The product choices are imaginative and interesting.
+ CafePress also employs a "marketplace" model where designers can offer their products for sale and rely on CafePress for all the infrastructure and service. Although per-unit prices are high the model allows a broad selection of products that would be impossible to achieve without a huge investment in inventory.
+ The company has reached profitable scale operations and we estimate 2012 revenues of $225M with posi-tive operating margins.
+ Management and some existing investors have indicated an interest in purchasing up to 300,000 shares in the IPO which is a positive signal and will further restrict the number of shares for sale in the aftermarket.
= The management team is solid but seems somewhat stiff and perhaps not as fully prepared to be a public company in what could become a more competitive market in the medium term.
= Small offering size and low share count will tend to increase stock prices but may add to volatility.
= Management has provided a target model but not broken down by operating expense category.
= Two million shares of the proposed 2.5M share offering are by selling shareholders. The size of the deal may be increased but we would have liked to see more primary shares in the offer to raise cash.
- Because per-unit prices are already high the company doesn't have much room to improve gross margins, which were 43% in 2011. The target model is 42-45%.
- It's not clear how defensible this business is. The high-unit costs make the company vulnerable to alter-natives that offer better pricing. Even existing customers tend to move off CafePress for any products that are popular enough to be sold in volume. A threat would most likely come from a volume producer willing to invest in the front-end infrastructure to offer a similar but more variable production and pric-ing model.
- Overall one gets the impression that CafePress is being rushed into being a public company to satisfy the need for some existing shareholders to get liquidity. Sales have rebounded from the drop in 2009 but the management team, company culture and execution may not yet be ready for prime time public market visibility.
CafePress offers a mix of good and bad with what will be a small number of available shares and an attractive valuation. So the deal itself should do well. The company will have to prove their readiness for the public markets over the course of the next year. We'd wait and see how that develops.
Another recent IPO in the rapid manufacturing space, Proto Labs (PRLB) has done very well and may help CafePress find a strong bid.