Casper: This Senseless Dip Should Be Bought
- Shares of Casper have fallen more than 70% from peaks and are trading near all-time lows.
- Casper’s current market cap of ~$175 million is barely more than a quarter’s worth of revenue.
- Pessimism in the stock has built up after the company delayed its breakeven expectations until 2022.
- With strong gross margins and consistent growth, however, this is just a minor blip in a longer-term bullish thesis.
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In my view, the market correction that has happened over the past several weeks has been far from irrational. With stocks having appreciated so quickly over the past two years, it’s only a small wonder that investors are starting to feel nervous about valuations and rising interest rates.
That’s not to say, however, that every individual stock correction that has taken place has been rational. In one extreme example, Casper Sleep (NYSE:CSPR), already in correction mode after an August announcement that delayed the company’s expectations to hit profitability, sunk even further to new all-time lows. Now, this beloved mattress company - arguably one of the most recognizable new consumer brands in the sleep category - is in danger of heading to penny-stock territory. Down ~70% from peaks, shares of Casper are down 20% over the past month alone.
To me, this is a fantastic opportunity to buy into a great consumer brand at rock-bottom prices. With a market cap of ~$175 million, Casper is now barely worth over a single quarter’s revenue. The risk-reward profile here heavily favors bulls.
Ignore the short term noise: Casper Sleep is a long-term winner
Let’s start with the elephant in the room: why, beyond just general market pessimism, is Casper Sleep down so sharply over the past month? In August, alongside the company’s Q2 earnings release, Casper announced that it would hit adjusted EBITDA profitability in 2022, along with a list of the drivers and levers that the company will use to get there:
This, however, came as a shock and disappointment to most investors, who had been previously told that Casper would hit profitability in the back half of 2021. This is in spite of the fact that Casper pointed out that the profit headwinds preventing it from hitting its original target of 2021 breakeven are the same as many other companies have cited: factory capacity challenges, supply chain woes, and shipping rate increases.
My blunt answer here: who cares? This is a growth company that has spent hundreds of millions of its investors’ capital to build up a premium brand, recognized by most consumers. Casper’s high-end mattresses yield a 50%+ gross margin, much more than most other consumer products companies. In my view, a half-year delay in profitability expectations (from the back half of 2021 to sometime in 2022) doesn’t make much of a difference, especially when this delay / reduction in profitability is being felt across virtually all physical product-makers.
Here, in my view, are the top reasons to be bullish on Casper:
- Casper has a huge TAM. The company has crafted the term "sleep economy," which it believes is a $432 billion annual market, $79 billion which is in the U.S. This is not a niche company selling small product categories. See the breakdown of that market in the chart below:
- Health and wellness continue to be hot topics. As the pandemic wears on, more and more consumers have placed comfort, health, and wellness at the top of their priorities. Sleep is a big component of this trend. Consumers are becoming more price-agnostic about investing in their comfort and wellness at home, which provides strong positioning for premium products like Casper.
- Continued product innovation at the top end of its product stack. In late April, Casper rolled out a major new Cooling Collection, featuring nighttime temperature solutions that took Casper 18 months of research to develop. It's branding this as "Snow" technology, and Casper added new Snow mattresses within its highest end brands. Both the Nova mattress lineup (the "plushiest" of the Casper mattresses starting at $2,095 for a Queen) and the Wave mattress lineup (the maximum support; $2,695 for a Queen) have Snow technology as an optional $500 add-on. Casper hasn't provided any hard data on the attach rates for its Snow upgrades yet, but has anecdotally noted that "initial response to the launch has been overwhelmingly positive." Given that Casper has always been marketed toward higher-end consumers, this add-on launch has a substantial potential to lift Casper's ASP and margin profile.
- 50%+ gross margins. For a consumer products company, Casper's ability to notch 50%+ gross margins is impressive and is evidence that at larger scale, Casper will be able to achieve profitability.
- Levers to profitability ahead. Casper has taken steps to outline what its profit drivers in 2022 will be, addressing investors' major concerns about its path to breakeven. Among the various initiatives Casper has outlined, the company expects that diversification of its supplier base will optimize its cost structure, while the company will also benefit from existing leverage/economies of scale with a retail store network and marketing investments that weren't fully utilized amid the pandemic.
- Trading at less than a year’s revenue. Casper trades at less than <0.5x next year's revenue estimate of $699.3 million (16% y/y growth).
Let’s now discuss Casper’s latest Q2 results in greater detail, which should serve to illustrate the point that Casper is far from a dying business. The Q2 earnings summary is shown below:
In Q2, Casper grew its revenue at a 38% y/y pace to $151.8 million, accelerating over Q1’s 13% y/y revenue growth pace and slightly beating Wall Street’s expectations of $151.2 million 37% y/y.
The company is still enjoying demand tailwinds that have picked up since the pandemic began, among which is the “cocooning” trend - consumers are more and more willing to spend on home comfort, given the amount of time that is now spent working at home / finding entertainment at home instead of going out.
Here are some helpful anecdotal comments from CEO Philip Krim’s prepared remarks on the Q2 earnings call, detailing the company’s go-to-market expansion:
The continued strong appeal of our brand and our product is clearly demonstrated by our consistent top line growth and ability to continue to grow our retail partners. In June, we announced that Casper products will be available to try in over 60 mattress warehouse showrooms with rollout to additional showrooms taking place later this year. And just a few weeks ago, we announced a national partnership that brings Casper’s award-winning suite of sleep offerings to Bed Bath & Beyond customers through their website and mobile app and in select Bed Bath & Beyond stores. As part of this partnership, Casper opened its first one-of-a-kind branded shop-in shop at Bed Bath & Beyond’s newly designed flagship store in New York City, and we are far from being done.
We expect to announce a number of new partners in the coming months that will further heighten the Casper brand and afford us additional trial opportunities. As we continue to increase the number of trial doors and leverage the proactive approach we’ve been taking to engage with our retail partners to drive sell-through, we expect our wholesale revenue to become more and more recurring in nature. While we are still operating with a small number of retail partners and trial doors compared to our peers, we are working towards increasing both at a very fast clip. As this base grows, we are confident that it will provide us with additional opportunities to engage with a greater number of potential customers and to reach current customers more easily and effectively, creating a revolving door for both existing and new customers to experience our products again or for the first time.”
The company notes that it is well-positioned to take significant market share gains in 2022. Combined with the expectation of easing supply-chain pressures that should put Casper’s gross margins above 50% again, plus a thoughtful cost-management strategy that included subleasing a portion of its real estate occupancy (that will generate $4 million in annual adjusted EBITDA savings), I think there is plenty for Casper to look forward to in 2022.
The selloff in Casper, in my view, has reached hysterical levels. While I don’t disagree that there’s plenty of risk in investing in a small-cap stock that is not yet profitable and faces a lot of competition in the mattress space, I think buying into this former venture-backed darling at just a $175 million market cap is a very enticing opportunity.
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Analyst’s Disclosure: I/we have a beneficial long position in the shares of CSPR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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