Casper – the wildly popular mattress and pillow startup – announced on Friday that they are going to go public in a filing with the federal government. Unfortunately it looks like their overwhelming popularity in the consumer market hasn’t yet translated in profitability, making this an IPO that you should most likely take a pass on.
What’s wrong with the Casper IPO
Morgan Stanley and Goldman Sachs will be underwriting the initial public offering. These are the same large banks that underwrote some of the most overinflated and unprofitable tech IPO disasters in recent memory. Companies like WeWork, Uber, and Lyft have seen their valuations drop dramatically since their IPO day. This hurt retail investors who bought their shares on the public market but helped the early, private investors who were able to get in early and offload their shares during the IPO.
Most disturbingly, the company’s S1 filing is riddled with some of the same silliness that we’ve seen from other tech IPO failures. Infantile graphics riddle the document, along with made-up terminology like the “Sleep Economy”, which Casper hopes to monopolize using their “Sleep Arc”…somehow. The company also never bothered to actually explain what the “Sleep Economy” even is.
As if that wasn’t preposterous enough, the company also claims that there is a “wellness equation” consisting of three pillars: fitness, nutrition, and sleep. Casper claims that their three pillars are now “major consumer categories”. I literally can’t even wrap my head around what they’re trying to say there.
The previously mentioned Sleep Arc is a term that Casper uses to describe their opinion that “sleep consists of more than just the act of sleeping, and instead, includes the entire set of human behaviors that span from bedtime to wake-up and affect sleep quality.” This trendy statement most likely means that the company is planning to turn everything related to sleep into a commodity that they can then monetize.
Risks of investing in Casper
Once you make your way past the standard-issue tech IPO ridiculousness and get to the “Risk Factors” section you’ll see why this public offering is destined for failure. In this section Casper admits that they “may not achieve profitability when expected, or at all.”
The 44 page Risk Factors section includes gems such as “We have a history of losses and expect to have operating losses and negative cash flow as we continue to expand our business.” It doesn’t take a PhD in quantitative finance to realize that investing in a company with negative cash flow is probably not the greatest decision.
Don’t get me wrong, we love their products here at Sleepline. We reviewed their products and ranked their hybrid mattress as being the best bed for stomach sleepers and consider their pillow to be one of the best available on the market today.
Unfortunately, that popularity hasn’t translated into profitability. In 2017 Casper had net losses of $73.4 million and in 2018 managed to dig their hole even deeper after posting a net loss of $92.1 million with a $232.2 million deficit by the end of the year. Despite repeatedly warning that they’ve never earned a profit and possibly never will, Casper is privately valued at $1.1 Billion.
The next concerning statement from the Risk Factors section is: “Our future growth and profitability depend on the effectiveness and efficiency of our marketing programs.”
If Casper wants to monopolize the so-called “Sleep Economy” they are going to have to disrupt established competitors and also steal market share from other rival direct-to-consumer startups like Saatva, Puffy, and DreamCloud. Their ability to do that is questionable at best and no retail investor should risk their money on the possibility that they may ultimately be successful.
If you think it can’t get worse, get a load of this: “An increase in our return rates beyond historical levels could have a material adverse effect on our revenue, cash flows and reputation.” Their plans for the future of their business relies on the hope that customers won’t return their mattresses more than they have in the past. Since the company is competing with other brands that offer similar products directly to consumers they will most likely have to compete by offering even more generous return policies. It’s reasonable to assume that a certain number of consumers will take advantage of those policies and return their mattresses.
According to the S-1, the company saw $390 million in sales in 2019 with $80 million in returns, refunds, and discounts. Since returns, refunds, and discounts are the primary way that mattress companies market themselves, we can expect that number to increase after they go public.