Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
Today we’re taking stock of the latest from Casper, the D2C mattress company that is going public. The unicorn announced its initial IPO price range this morning, targeting a $17 to $19 per-share IPO price range — an interval that dramatically reprices the firm. When Casper first filed to go public, questions regarding its unprofitability, growth rate and economics quickly arose. Whether the firm would be able to go public at a flat price to its final private round was not obvious, and today’s news makes it clear that that is not likely.
Let’s explore the pricing and the company’s new valuation range, then figure out what the hell went wrong. To understand the new pricing, we’ll dig into the company’s preliminary full-year 2019 results. Let’s go!
Prices, ranges
Casper is hoping to sell 8.35 million shares at $17 to $19 apiece, with another 1.25 million shares reserved for its underwriting banks. Without the option, Casper could raise from $142 million to about $159 million. Including the underwriters’ shares boosts those results to $163 million to $182 million.
Where do the price ranges value the company? Exclusive of underwriter shares, Casper is worth between $666 million and $744 million, figures that rise to $687 million and $768 million with the extra equity added in. Recall that Casper was valued at $1.1 billion when it raised $100 million back in March of 2019. In about 10 months, then, Casper’s valuation has dropped by as much as 40%. On the upper end, the haircut is a slimmer, but still stern, 30% reduction.
What went wrong? Casper’s growth simply wasn’t fast enough compared to the scale of its losses. Investors today want cleaner operating results and faster growth than what Casper delivered. It also didn’t help that a public rival — Purple — looked like a bargain compared to Casper’s own results.
As with One Medical, Casper provided new numbers today. We now have a set of figures for its calendar 2019. Let’s explore those and get a handle on its new valuation and implied multiples. Is the valuation cut fair? And is Casper going to try to raise its range? Let’s find out.
Results, margins
Casper’s latest figures are, to quote, “preliminary estimates for the year ended December 31, 2019.” As such, they are not final and if you invest in the company you should anticipate the possibility of change. That’s not investment advice, mind, it’s merely a morning literacy check for us both.
Right, what do the figures show? Here’s the stuff we care about:
- Revenue growth of 23% at the midpoint of expected 2019 revenue of $437.3 million to $441.3 million. In 2018 the company’s revenue totaled $357.9 million.
- Gross profit growth of 36% at the midpoint of expected 2019 gross profit of $213.0 million to $217.5 million. In 2018 the company’s gross profit totaled $157.8 million.
- Gross margin of between 48.7% and 49.3% in 2019, “increase of 490 bps at the midpoint of the range as compared to 44.1% for the year ended December 31, 2018.”
- Sales and marketing spend growth of around 23%, or $29.5 million, to between $155.5 million and $155.8 million in 2019.
- A net loss that rose 2% compared to the year prior, or $1.8 million, to “between $96.4 million and $91.4 million” in 2019.
- An adjusted EBITDA loss of between $74.9 million and $70.4 million, an “improvement of $9.8 million or 12% at the midpoint of the range” from its 2018 result of -$82.4 million.
The gist: Casper’s losses feel mighty sticky as the company’s growth disappoints. The only number that sticks out as positive is its gross margin improvement, which we presume helped lead to the modest reductions in adjusted losses. Other than that, Casper looks set to continue deep unprofitability.
What sticks out as the worst thing in the above is that Casper spent, say, $156 million on sales and marketing in 2019 to grow its revenue by a little more than $80 million. That means that it has to spend a lot to just sell as much as it did the year before. And that to grow, it will have to spend lots more. That’s not the model that we hear investors are coveting in 2020.
Multiples, misses
Using a middle-ish $440 million revenue multiple for Casper’s 2019, the firm is valuing itself (using the $666 million and $744 million IPO valuations calculated without possible underwriter shares) at around 1.5x to 1.7x its trailing revenue. For that reason, I wonder if Casper is going to try to raise its range.
With gross margins of nearly 50%, you can almost taste the optimism. Surely we’re worth more than that, right? We’ll see. If Casper fails, however, to raise its prices, and the IPO finds demand between $17 and $19 per share and goes out, it will represent a dramatic repricing of a unicorn.
Indeed, it will be the public de-horning of a formerly mythical beast into a regular horse. More when we have it.