Casper IPO: Don't Touch With A Ten-Foot Pole - Seeking Alpha

  • 10 February 2020

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The eagerly-watched day of Casper's (CSPR) IPO has come and passed. The mattress startup, which was named as one of "The Most Influential Products of the Past Decade" and has marketed itself as selling America's number one mattress, priced its IPO at $12 per share - far below where it had originally hoped. Its original pricing range called for shares to trade between $17-$19.

Of course, that low pricing was established by Casper's bankers to generate a first-day "pop" - a psychological bellwether that most companies desire even though it means leaving money on the table. And pop it did - on its first day of trading, Casper shares rose ~13%, with an initial ~25% jump smoothing out and eventually falling throughout the course of the day:

ChartData by YCharts

Despite this Day 1 rise, many news outlets have deemed Casper's IPO a "disaster." Casper's IPO is one of the first high-profile IPOs into 2020, and investors looked to Casper as a barometer of exactly how "open" the IPO window is. Initial predictions that investors would view loss-leading companies frostily turned out to be true - wary of Casper's slowing revenue growth and low margins, enthusiasm for Casper's IPO turned out to be a lot lower than expected. It remains to be seen if other high-profile tech startups, especially Airbnb (which has promised to go public in 2020) will now put their own public debuts on the back burner.

Casper's muted IPO performance puts the stock squarely in small-cap territory, with a market cap barely above half a billion dollars (interestingly, Casper lost unicorn status in its IPO - something that has happened to other spectacular consumer IPO flameouts, including Blue Apron (APRN)). The question for investors now is: is Casper investable and will the stock eventually rise, or is the current risk-off attitude in the markets going to be a persistent headwind to Casper's stock price?

My take: don't touch Casper with a ten-foot pole. While the company's product innovation and category leadership is certainly commendable, we don't see a path to profits with Casper's current performance - something Wall Street is very keen to punish for these days. Casper can advertise its supposed ~$585 billion market opportunity within the self-labeled "sleep economy" all it wants, but at the end of the day, the company has to survive and scale to profitability in order to take advantage of that wide market - something we're not sure it can do.

Steer clear here and invest elsewhere.

Final offering details

Here's how the nuts and bolts of the Casper deal ended up shaking out:

  • Shares priced at $12, far below the initial pricing range of $17-$19 (the upper end of that range would have given Casper a market cap of ~$750 million, which is still below its prior private valuation of $1.1 billion). This indicates that Casper's bankers had to lower pricing in order to stimulate the order book amid an unresponsive market.
  • The company sold 8.35 million shares in the IPO, raising $100.2 million in gross proceeds from the offering. After netting out typical investment banking fees and legal expenses (which tend to be around 7% of the raise amount), Casper will have raised roughly ~$93 million for its own coffers.
  • Post-IPO, there are 39.63 million shares outstanding. This indicates that Casper sold ~21% of its outstanding shares in the IPO, which is a fairly high amount (typical tech startups tend to sell roughly 15% of available shares in an IPO)
  • All of the shares sold in the IPO were new issuances.
  • Use of proceeds for the IPO capital is still vague, with the company listing "general corporate purposes" and working capital as the main beneficiaries.
  • A typical 15% greenshoe option is still outstanding, creating the possibility of selling an additional ~1.25 million shares and raising an additional $15 million
  • Similar to other IPOs, insiders (other than those who sold their shares in the IPO) are subject to a 180-day lockup period, expiring in August
  • The deal was led by Morgan Stanley (MS), Goldman Sachs (GS), and Jefferies.

Figure 1. Casper offering detailsSource: Casper IPO filing

In addition, here's a look at the major individual and institutional holders of the stock post-IPO:

Figure 2. Casper major holdersSource: Casper IPO filing

Philip Krim, Casper's founder and CEO, owns ~6% of the company post-IPO (also an unusually low stake for a founder-CEO). VCs own the lion's share of the company, with New Enterprise Associates (NYSE:NEA) having the largest stake at 12.5%.

The big problem: Casper's losses are straining its balance sheet, and even the IPO infusion may not be enough

Here's the biggest issue that's dragging sentiment on Casper downward. It's actually the biggest conundrum of the IPO markets: investors like best the companies that can prove they need IPO capital the least.

In Casper's case, this is far from the truth. The most recent balance sheet we have from Casper is dated as of the third quarter of 2019, and it contains $54.9 million in cash.

Figure 3. Casper balance sheet

Source: Casper IPO filing

Now, let's generously assume that Casper has not burned through any more cash in the fourth quarter of 2019 (an aggressive assumption given that Casper burned through ~$27 million in operating cash flows in 4Q18)). This means that, with the $54.9 million of cash currently on its books plus the ~$93 million in net proceeds that Casper will gain from its IPO, it will have cash liquidity of ~$148 million.

Last year, Casper burned through $72.2 million in operating cash flows alone, plus an additional $13.1 million in capex - totaling an FCF loss of $85.3 million.

Figure 4. Casper cash flowsSource: Casper IPO filing

Now, the good news is that OCF losses have minimized this year. But with Casper's IPO infusion, we can only assume that Casper will want to invest aggressively into its business (particularly into marketing), spending which may only be revenue-accretive in future years. Based on last year's FCF losses alone, Casper has barely over a year and a half of liquidity available. And without the ~$93 million infusion from the IPO, Casper would likely have been cash-crunched by year end.

Unfortunately, Casper's capital-raising opportunities are rather limited. With large and growing GAAP losses, bank lenders will have to cross significant regulatory hurdles in order to give Casper financing. Private debt is an option, but that comes with high interest. And given Casper shares are trading far below where the company initially hoped, a secondary equity offering would only be even more dilutive to VCs and insiders.

Key takeaways

The core message here: Casper is far from proving that it can run a sustainable, profitable business and wean itself off capital injections. Casper's IPO wasn't just a marketing event that many tech companies undergo to increase their legitimacy - it was a bona fide necessary capital raise. And there's nothing that scares investors off more than that.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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