Casper’s IPO Can’t Rest on a Growth Story, NYU’s Damodaran Says

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(Bloomberg) -- Bed-in-a-box peddler Casper Sleep Inc. is touting a rapid growth story ahead of its anticipated initial public offering on Feb. 5, but its proposed valuation appears too rich for its business model, says New York University’s Aswath Damodaran.

Casper last week proposed an IPO range of $17 to $19, implying a market valuation of about $740 million at the high end. While Damodaran gave credit to the online mattress retailer for its sales growth and implied trajectory, he said its initial offering price is not supported by its model. He pegged its per-share value at roughly $13, a 24% discount to the low end of the range.

The Stern School of Business professor said Casper’s growth rate has come at the expense of its operating margins because the company outsources its mattress manufacturing. That has helped it grow faster than traditional mattress retailers, but also sacrificed economies of scale. Tempur Sealy International Inc., for example, can’t do 20%-plus growth, but it also has operating margins in the low teens, he said. That compares to negative operating margins in the double digits at Casper.

“Casper’s trouble is that one half of their story is at war with the other half,” Damodaran said in a telephone interview.

The New York-based company had 60 stores in the U.S. and Canada as of Sept. 30, and showed sales growth of 20% to $312 million for the nine months ended in September over the previous period. Operating losses were $65.1 million, compared with $64.7 million in the year-ago period.

If Casper continues to grow at the same pace and outsources manufacturing, its margins will never be as rich as Sealy’s, Damodaran said.

“What [Casper] likes to tell you is that they can have both -- high growth and high margins. If they get 11% margins with their assumed growth, their valuation can go to $1.5 billion, but I don’t see how they can do that,” he said.

Casper’s competitive advantage is “clever marketing,” which requires a lot of advertising spending but can also be easily replicated, he said. Case in point: Damodaran sleeps on a competitor’s mattress called Leesa, which shares a mattress manufacturer with Casper.

Damodaran arrived at his $13 per share valuation with the assumption that sales increase at a 25% annual clip for five years from a baseline of $411 million, with operating margins of negative 23% over that time. In the next five years, he assumes a sales growth rate of 1.8% with operating margins of 6%. Dilution due to additional capital raising is also built into his valuation.

“Their constraint is that even with growth, the overall market -- the sleep economy or whatever they want to call it -- just isn’t big enough,” he said. Casper put its addressable market at $432 billion globally and at $79 billion in the U.S., according to filings.

And what does he make of the fact that its proposed valuation is below a previous estimate of $1.1 billion? “The WeWork hangover still seems to be there,” he said. “Casper can’t skate by with a growth story.”

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