Cricut, Inc. (NASDAQ:CRCT) had a very strong second quarter. Revenue increased 42% compared to the same quarter in 2020. This is very impressive because the 42% is on top of the 149% increase the company saw in 2020 over 2019.
Breaking down the revenue, machine sales grew 29%, accessories and materials grew 40%, and subscriptions grew 111% - the company's highest margin segment. In addition, international revenue grew 179%. This represents 8.5% of the company's total revenue, which is up from 4.3% in the same quarter last year.
However, despite such a strong quarter, the stock plummeted similar to many other companies that have followed a similar trend. The reason? On the conference call with analysts, management noted that second-quarter results benefited from channel fill as the company filled retail inventories with the new products.
The finance chief stated, "As a result, product sell-in during Q2 materially exceeded sell-through. These tailwinds will not continue in the second half."
Management also suggested that people are spending less time at home as parts of the country show progress in controlling the pandemic. This showed up in the company's user engagement metric which declined to 59% from 63%.
However, we need to look at the more important numbers that paint a better picture. First off, the fact that investors can still be surprised about some short-term softness due to reopening is mind-boggling. This is especially true because it's only short-term. The growth is still compounding on top of stellar growth from 2020. As a result, most growth catalysts still remain intact.
In 2020, Cricut saw a surge of users; 1.8 million new users to be exact. Without a doubt, the pandemic had a hand in this surge. However, Cricut still expects to add at least an additional 1.8 million more for 2021 which would represent an approximate 42% increase. Year-to-date, the company has already added 1.1 million users, bringing the total count to 5.4 million.
In addition, the slight decrease in engagement is not something to worry about. Summer has always been a softer month for the company even prior to COVID-19. It's also important to remember that the slight decrease in engagement happened over a much larger user base. Furthermore, it happened during a period where people were finally allowed to go out and do things after a long time being stuck at home. Therefore, a 400 basis points decrease is not really a big deal.
Moreover, management noted that engagement has so far picked up in Q3 and expects the percentage to be higher than last year.
When you look at the engagement percentage number, the number will increase year-on-year. But as we go into the holidays, with similar to back to school, as we see people getting, say, more at home, getting into the holiday mode, Halloween, and Christmas, and everything else that goes with it, we'll see good uptick in some of those numbers.
Most importantly though, Cricut has a very loyal following. Approximately 33% of its users are subscribed to its cloud platform which provides users with over 175,000 different designs. This segment is their highest margin segment with gross margins of almost 90% and made up about 15% of revenue in the quarter.
This strong loyalty has translated into approximately 43% of new users first hearing about Cricut through word of mouth. This allows the company's marketing dollars to go even further because word-of-mouth marketing is very cost-effective since existing customers do the work.
It also demonstrates that Cricut's strategy of focusing on great customer experience is working. Users love the products so much that they act as brand ambassadors without being paid. The larger the community grows, the stronger the word-of-mouth impact becomes.
Furthermore, although ARPU decreased for accessories and materials from $32.23 to $26.67, management is confident it can sustain the $26 range going forward.
And we feel good about the $26.67 cent, ARPU number, and let me explain why. So if you just ignore 2020 for a moment, it was an odd year for a lot of reasons. If you look back to 2018 and 2019, 26.67 is actually $2.50 higher than what it was in 2018. So the calculation for ARPU, remember, is accessories and materials revenue divided by our entire user base. And so we've actually increased that ARPU by $2.50, while quadrupling the user base over that same time period. And so we feel pretty good about that $26.67
Lastly, the company estimates that it has a serviceable addressable market of 130 million users when including international users. At 5.4 million current users, Cricut has a long runway for growth as it continues to add users to its network.
Valuing Cricut is tricky because there isn't too much historical data and the impact of COVID-19 makes it difficult to forecast growth. Even management has refrained from providing definitive revenue guidance for the second half of the year.
Nonetheless, we can take a look at the price target from analysts to get an idea of what the market expects from Cricut.
As you can see, there is a fairly wide range of targets between $28 and $40 with the average being $33.20. Therefore, as of this writing, Cricut is trading close to fair value estimates from analysts. That's not bad for a company whose growth will likely pick up again once the tough comps have passed.
We believe Cricut is a solid company whose growth will still be fairly high even if it's not as high as analysts had initially expected. However, sentiment is likely to remain negative for a while. Thus, we remain neutral on the stock for now and will watch to see if prices continue to fall for a more opportunistic entry.
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