https:\/\/www.youtube.com\/watch?v=3iL3a65-DmQ&feature=youtu.be\r\n\r\nThe mythical "Sleep Economy" got its start in 2014 on the New York City subway, where commuters were force fed mattress ads blanketing the subway cars.\r\n\r\nCasper (NYSE: CSPR) arguably founded the direct to consumer (D2C) foam mattress model and has been one of the main beneficiaries of a market that grew from almost nothing in 2014 to reach an\u00a0estimated $3 billion in 2019.\r\n\r\nA whole lot has changed in the D2C mattress peddling game since then.\r\n\r\nCasper is now just one of more than 150+ companies selling mattresses online and even the slow-moving brick-and-mortar mattress brands are selling D2C foam mattresses of their own.\r\n\r\nWe've published the most comprehensive industry analysis on the the "Sleep Economy". Is Casper a worthy growth investment or a money hemorrhaging bed bug?\r\n\r\n\r\nThe Quick and Dirty on Casper Stock\r\nCasper sells a product that is being copied by more and more competitors.\r\n\r\nThe company uses one of four large manufacturers and doesn't own any intellectual property making it hard to stand out from the crowd.\r\n\r\nRevenue growth is slowing, while profitability is nowhere in sight.\r\n\r\nEven if the company generates profit margins in-line with peers who are already profitable, the stock is worth at most $8.00\/sh in 2020, 33% lower than the expected IPO price of $12.00\/sh.\r\n\r\nThis is a stock you should avoid unless management can accelerate growth or you can buy in at a bargain-basement price below $8.00\/sh.\r\n\r\n \r\nThe State of the Mattress Industry\r\nCasper is selling itself as a disruptor of the "sleep economy", a new term created by someone on the marketing team who probably received a tropical vacation for their efforts.\r\n\r\nThis previously undiscovered sleep economy is apparently already worth $432 billion growing to $585 billion in five years.\r\n\r\nThis slide from Casper's prospectus makes it look like the company's $360 million in 2018 sales are just scratching the surface.\r\n\r\nHowever, if we dig a bit deeper something just doesn't add up.\r\n\r\n\r\n\r\nReading the fine print we realized "sleep economy" is shorthand for "everything but the kitchen sink"\r\n\r\nIt includes not just mattresses and pillows but lights, furniture, sleep monitors, sound and scent devices, medical devices, clocks, digital apps, supplements, even meditation and counseling...\r\n\r\nDo we need to keep going?\r\n\r\nAfter reading the true meaning of sleep economy it made more sense why we couldn't get to sales above $10 billion when we added up mattress sales for the six largest online and in-store mattress sellers.\r\n\r\nYes we are probably missing a few dozen smaller brands, but there is no way we were getting from $10 billion to $79 billion.\r\nSize of Fictitious Sleep Economy vs Actual Mattress Sales in North America\r\n\r\n\r\nThe real North American "sleep economy" turns out to be a mattress market worth around $11 billion today, growing 15% a year to $25.8 billion by 2025 according to Grandview Research.\r\n\r\nWe only use the North American market because neither Casper nor any competitor we know of is showing meaningful growth outside of the U.S. and Canada.\r\n\r\nThese are North American-centric companies for the foreseeable future.\r\nMarket Share in the True Mattress Market (North America)\r\n\r\n\r\nThe mattress market may be growing at 15% a year, but the online-only model is showing signs of maturing with Casper's D2C growth falling to an estimated 17% in 2019 from 42% in 2018 while public competitor Purple is only growing D2C sales 7% so far in 2019.\r\n\r\n\r\n\r\nMost online mattress companies source their beds from one of four major suppliers and Casper is no different.\r\n\r\n\r\n\r\nThe decision not to create patented products in-house has come back to bite the company as they now are struggling to stand out in an increasingly crowded field.\r\n\r\nCasper isn't benefitting from the same economies of scale as if they produced mattresses in-house.\r\n\r\nWith online ads costs increasing and competitors popping up left and right, Casper is in an increasingly contentious battle for market share.\r\n\r\n \r\nHow Does Casper Stack up Against the Competition?\r\nWhen we started looking into Casper's business model we were pleasantly surprised to see a direct competitor that's already been public for almost two years.\r\n\r\nSo how does Casper stack up next to this competitor, Purple Innovation (NASDAQ:PRPL)?\r\n\r\nThe answer is not well.\r\n\r\nFirst looking at growth, Casper's revenue growth is tracking at 23% for 2019, down significantly from 43% growth in 2018.\r\n\r\nDrilling down to the online business, growth is even slower at 17%, which we think signals online competition is heating up.\r\n\r\nCompared to Purple who is growing revenue at 50%, Casper seems to be hitting a wall.\r\n\u00a0Casper Growing Slower than Competitor Purple (YoY Growth)\r\n\r\n\r\nSlower growth is all good if a company is profitable, but here again, Casper comes up short.\r\n\r\nCasper is almost the same size as Purple yet it loses $0.20 for every dollar of sales compared to Purple's $0.10 of profit.\r\n\r\nMost confusing to us is why Casper spends 35% of revenue on payroll while Purple is the same size, yet spending only 7%.\r\nCasper Still Far from Profitable (Operating Margin)\r\n\r\n\r\nSumming it all up, investors are left with a company growing slower than its peers while also losing far more money.\r\n\r\nThis is a recipe for a valuation disaster which is already coming true with the IPO price coming in 60% below the last private funding round.\r\n\r\n \r\nValuation (The Problem with Purple)\r\nHaving a direct public comparable must have been a nightmare for Casper management.\r\n\r\nAs an investor, now we can see what the public markets are willing to pay for an online mattress seller and can adjust the price we are willing to pay for Casper accordingly.\r\n\r\nCasper started IPO meeting with investors asking for up to $19\/sh but that price quickly fell apart.\r\n\r\nInvestors probably told them, "I can buy the stock of Purple, a faster-growing, more profitable company with a patented bed design for a 20% discount to what you are asking. Why in the world would I buy this IPO?"\r\n\r\n\r\nCasper's P\/S Multiple at Original ($19) and Current ($12) IPO Price.\r\n\r\n\r\nThis chart actually makes it look like there is 30% upside in Casper if management can reignite growth and trade in line with Purple.\r\n\r\nHowever, this chart is misleading and once we dug into the potential profitability of Casper longer term we realized there is more downside to come.\r\n\r\n \r\nCasper Ultimately Worth only $8.00\r\nThe market prices companies on a multiple of sales when they are unprofitable and then switches to a multiple of earnings once they are.\r\n\r\nFor this reason, we wanted to see if there was upside in Casper if the company managed a Hail Mary and turned profitable.\r\n\r\nCasper spends 35% of revenue on payroll compared to Purple's 7% so we figured this would be where the cost improvements mainly come from.\r\n\r\nAssuming a best-case scenario where Casper cuts payroll to only 7% of revenue they would generate a net income margin of 6% or 4.4% after tax.\r\n\r\nApplying this margin to our estimate for 2020 sales and using Purple's P\/E multiple of 16.5x we arrived at a stock price of only $8.00, 33% below the IPO price of $12.00.\r\n\r\n\r\n\r\nIn $Millions\r\n2020\r\n\r\n\r\nRevenue\r\n508\r\n\r\n\r\nNet Income Margin\r\n4.4%\r\n\r\n\r\nEarnings Per Share\r\n22\r\n\r\n\r\nP\/E\r\n16.5x\r\n\r\n\r\nMkt Cap\r\n369\r\n\r\n\r\n$\/Sh\r\n$8.00\r\n\r\n\r\nIPO Price\r\n$12.00\r\n\r\n\r\nUpside\/(Downside)\r\n-33%\r\n\r\n\r\n\r\nSo even if Casper dramatically cuts costs and reignites growth the slim margins point to a stock that is still overvalued, even with a 36% cut to the IPO price.\r\n\r\nManagement is effectively trying to make investors pay a 2022 valuation in 2020.\r\n\r\nBelow $8\/sh we would be buyers of Casper as an upside surprise in growth is no longer priced in.\r\n\r\nThe stock should trend higher with revenue growth over time, but is overpriced in the here and now.\r\n\r\nShare Structure\r\nUnderstanding who owns the shares and at what prices is absolutely critical if you choose to trade newly public stocks.\r\n\r\nInsiders are generally always required to hold their shares for between three to six months so the stock will be unusually volatile while there is a scarcity of shares available to trade.\r\n\r\nSmall changes in buying and selling volume are magnified and the stock price can really move, both up and down while this is going on.\r\n\r\nHistorically once the founders and insiders are permitted to sell their shares, the stock typically falls for a period of time before fundamentals bring in new buyers who bid the price back up.\r\n\r\nUnderstanding when the shares 'unlock' and the size of gains insiders are sitting on are two key pieces of information you need when investing in or trading a newly public stock.\r\nInsiders Bought in at $17.50 on Average\r\nLooking at the history of capital raises for Casper, company insiders are sitting on much smaller gains than we've typically seen from startups.\r\n\r\nYes the founders and early investors are sitting on 600%+ gains, but their shares will represent only 20% of shares outstanding once the company goes public.\r\n\r\nThe rest of the shares were purchased for between $22-$31 per share meaning insiders as a whole are just barely breaking even if the stock IPO's at $18\/sh as planned.\r\n\r\nIPO shares will make up 24% of the share count, larger than the 17%-20% we typically see. This is a sign management is going public to raise cash and cares less about worse than average dilution to the value of their stake.\r\n\r\nA lack of insider gains tells us there should be relatively less selling pressure compared to other IPOs but there are still 9 million shares acquired for less than $3.00 that could weigh on the stock price if founders want to realize some gains.\r\nCasper Funding Rounds (Larger Bubble = More Shares)\r\n\r\nShare Lockup Expires Aug. 5 2020\r\nAs is typical for an IPO, insiders will be required to hold their shares for 180 days after the filing of the prospectus.\r\n\r\n\r\n\r\nSpecific language in the prospectus makes it sound like the banks who worked on the deal can technically unlock the shares at any time, letting insiders sell into the market.\r\n\r\n\r\n\r\nBottom Line: Be aware that the stock price will likely take a hit around Aug. 5 so plan your entry and exit accordingly.