Here's why business experts think $1 billion Casper's planned IPO could be a bust
- Online mattress company Casper, which filed for an initial public offering last week, could find it hard to complete its IPO, business experts told Business Insider.
- Wall Street has soured on unicorns, or startups valued at $1 billion or more, that lose money.
- Casper is losing money, thanks to high marketing, administrative, and return costs.
- But the company's valuation could also hinder its IPO; comparable public companies that are actually profitable are valued far less on a price-to-sales basis.
- "They all want to pitch themselves as tech companies," Synovus' Dan Morgan said. "To me, this isn't a tech company. I hate to tell you, you're just an online marketer that sells mattresses."
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Wall Street may not end up being a friendly place for Casper.
There's a good chance that the company's bid to go public will meet with a chilly reception from public investors, business experts told Business Insider. WeWork's aborted initial public offering and the poor performance of many of the high-profile startups that completed their offerings last year could dampen demand for shares in yet-another money losing and arguably overvalued young company, they said.
"I would refer to Casper's IPO as 'Casper's possible IPO,'" said Robert Hendershott, an associate finance professor at Santa Clara University's Leavey School of Business. "If WeWork is any sign, it's going to be very hard for them to go public."
Casper filed for a public offering last week. Its IPO document revealed that it lost $65 million in the first nine months of last year, or about 20 cents for every dollar of revenue. Huge marketing and administrative costs have weighed on its results.
Wall Street has shied away from money-losing unicorns
So too have product returns. Like many of its competitors, Casper offers a generous return policy; customers can send back mattresses up to 100 days after receiving them. And consumers have taken advantage of that. Refunds, returns, and discounts cost the company $80 million in the first three quarters of last year.
Unfortunately for the company, Wall Street hasn't had much of an appetite lately for money-losing unicorns, or startups with a valuation of $1 billion or more - a level Casper reached with a funding round in February. Uber, Lyft, and Slack shares are all trading well below the prices at which they debuted last year. Pinterest and Peloton are barely above their IPO prices.
"I think that gravity is back," said Rob Siegel, a lecturer in management at Stanford Graduate School of Business, adding that companies both public and private are being forced to focus on their unit economics rather than on growth at all costs. "This is going to be a tough market to go public in."
Investors got burned so much last year by companies that were bleeding cash, that they almost certainly will be less aggressive about investing in such companies this year, Hendershott said.
"I think that we are going to see a lot fewer money-losing IPOs in 2020 than we did in 2019," he said.
Casper's valuation looks pricey compared to its peers
Part of what could hinder Casper's public offering - in addition to its losses - is its valuation. The company hasn't given an estimate of what it expects to be worth in its public offering, but private investors valued it at $1.1 billion last year. That would give it a price-to-sales ratio of about 2.7, based on its trailing-twelve-months revenue.
When compared with some of last year's IPOs, that doesn't seem super-excessive, said Dan Morgan, a senior portfolio manager at Synovus Trust and a longtime tech investor. When Uber debuted last year, it had a price-to-sales ratio of around seven to eight. Lyft's ratio at the time of its IPO was 11. And Slack's was a whopping 50.
But those aren't necessarily the best companies to which to compare Casper. The company after all is basically a mattress manufacturer. As such, its peer group includes Tempur Sealy, Sleep Number, and Purple Innovation. Collectively, those companies are valued at about 0.8 times their sales - or about one third Casper's corresponding valuation. What's more, unlike Casper, all three are profitable.
Purple may be the best company to stack up against Casper. It had similar sales in the first nine months of last year - $304 million for it, compared with $312 million for Casper. But its revenue grew at more than twice Casper's rate in that time period -47% compared with 20%. Unlike Casper, it turned a year-earlier loss into a modest profit of $126,000.
From those numbers, you might think that Purple would be worth a lot more than Casper. But you'd be wrong. Purple's market capitalization stands at $607 million, or about half that of Casper's last private valuation.
"I think it will be interesting to test this billion-dollar valuation point for this particular category," said David Hsu, a professor of management at the University of Pennsylvania's Wharton School. "It's not a great IPO market, obviously."
Casper isn't really a tech company
Another factor that could weigh on Casper is that investor sentiment has completely reversed on startups like it that aspire to be considered as tech companies but really operate in other industries. WeWork was the pre-eminent example of that phenomenon, Hendershott said.
A year ago, SoftBank valued WeWork at $47 billion, and in its IPO documents, the company tried to play up its technology bona fides. But Wall Street investors saw through the ruse, recognized its as a real-estate company that was bleeding lots of money, and scoffed at the idea of paying a tech-like premium for its shares. The company ultimately pulled its offering, even after reportedly being willing to consider a valuation of as little as $10 billion. When SoftBank bailed out WeWork this fall - weeks before it was expected to run out of cash - it valued it at less than $8 billion.
Casper appears to be following in WeWork's footsteps, at least in terms of trying to present itself as a tech company. Its IPO paperwork mentions the words "technology," "technologies," and "technological" 121 times combined. That's more than even WeWork did.
In the document, Casper touted its "cutting-edge technology," bragged about its "large digital product and technology engineering teams," and talked about how its growth will be driven by "new technologies."
"We believe that technology will increasingly play a role in the continuous optimization of a sleep environment," the company said in the IPO paperwork.
But the business experts weren't buying it - and they suspect Wall Street won't either.
"They all want to pitch themselves as tech companies," Synovus' Morgan said. "To me, this isn't a tech company. I hate to tell you, you're just an online marketer that sells mattresses."
Got a tip about Casper or another startup? Contact this reporter via email at twolverton@businessinsider.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.
- Read more about Casper's public offering:
- Casper, the buzzy mattress seller adored by millennials, has a costly returns problem that could be a nightmare for its IPO
- Casper, the buzzy sleep startup that ignited the online mattress-shopping craze, has filed to go public
- Casper warns investors that its business would be hurt if any of its 'thousands' of Instagram influencers turned against it
- These are the unusual, colorful slides that mattress startup Casper is using to convince IPO investors that it can capitalize on the $432 billion 'sleep economy'
