As one of the first major IPOs of the year, Casper’s (CSPR) debut proved a bruising experience. The bed-in-a-box company gained unicorn status last year after a round of private funding valued it at $1.1bn (£0.85bn). But it exited the club before even reaching the public market with the mid-point of its initial $17-£19 IPO price implying a market capitalisation of $705m. Reducing its listing price to $12-$13, this pushed its valuation down to just $495m.
It’s hard to see how a mattress seller was trying to command a premium valuation typically associated with technology companies – although the word ‘technology’ is mentioned no fewer than 88 times in its IPO prospectus. It speaks to a wider trend of businesses going out of their way to boast supposed tech credentials in order to attract capital (see chart). Big tech tends to be associated with big profits and investors flock en masse to the disruptive technology du jour that promises to revolutionise the way we sleep, eat, work and travel.
The only way Casper really resembles a tech unicorn is in its losses. From $312m of revenue, it made a $67m net loss in the first nine months of 2019, and how it could become profitable remains unclear. A highly competitive direct-to-consumer mattress market in the US includes players such as Amazon (US:AMZN) and the long replacement cycle for mattresses means Casper spends a lot on marketing to win customers, but sees little repeat business. It spent an incredible $423m on marketing between 2016 and September 2019 and booked $80m in returns, refunds and discounts in the first nine months of 2019.
Casper has adopted the same high-growth, low-profit ethos favoured by Silicon Valley start-ups. Such companies have grown accustomed to the deep pockets of private equity who subsidise their losses as they pour money into fuelling growth. This culture has been turbocharged by the likes of SoftBank and its Vision Fund, spurring other venture capitalists to compete. But sky-high private valuations are increasingly at odds with how companies are perceived in the public realm. Investors are becoming more sceptical about lossmaking behemoths, looking for a credible path to profitability. This follows a series of disappointing blockbuster tech IPOs in 2019, many of whose share prices remain below their listing price. “The markets appear to be emerging from a psychotic break from reality”, says Scott Galloway, professor of marketing at New York University’s Stern School of Business. “The ugly process of repricing risk has begun.”
Arguably a key turning point was the rapid implosion of WeWork. The group’s mission is to “elevate the world’s consciousness” and it certainly woke investors up with the mismatch between its staggering losses and proposed $47bn valuation. Now worth just $7.3bn, its spectacular fall from grace contributed to SoftBank swinging to an operating loss of ¥13bn (£91m) in the nine months to 31 December, from a ¥1.9 trillion profit a year earlier.
Uber (US:UBER) appears to have heeded that warning as it seeks to regain investor confidence. Chief executive Dara Khosrowshahi recently acknowledged that “the era of growth at all costs is over” as investors demand “not just growth, but profitable growth”. The group’s full-year adjusted cash losses were up almost 50 per cent to $2.7bn in 2019, weighed down by investment in the Eats business. But the shares lifted on the news that it expects to achieve profitability sooner than forecast. Uber is now guiding it will be profitable on an adjusted cash profits basis in the fourth quarter of 2020 versus earlier projections for the end of 2021. This has placed pressure on fellow ride-hailing company Lyft (US:LYFT), which disappointed investors by maintaining its guidance of achieving cash profitability in the fourth quarter of 2021.
Other lossmaking unicorns such as Peloton (PTON) are stubbornly pushing forward with hypergrowth – “we're prioritising our subscriber growth over profitability” chief financial officer Jill Woodworth said in a recent earnings call. While it is guiding to profitability on an adjusted cash basis by 2023, investors remain sceptical, with short interest standing at 85 per cent of the issued share capital at the end of January.
