Casper Sleep (CSPR) has enjoyed consistent, double-digit annual revenue growth since the mattress company began in 2014. Management has done a great job of building a brand that is resonating with people looking to improve their sleep. In February of 2021, the company went public through a special purpose acquisition company (SPAC) merger.

Unfortunately for investors, growing demand for Casper products has not translated to market-beating stock performance. But the recent dip in the share price could be a good buying opportunity.

Here are three reasons why the stock could take off, and one reason why it could continue to underperform.

Person in bed undercovers with arms outstretched making the peace sign with one hand and holding a coffee cup in the other.

Image source: Getty Images.

1. Casper has accelerating revenue growth

In any industry, it's always a great sign when a business is showing accelerating growth in revenue. This is especially important for a consumer goods company like Casper that is trying to build its brand in what is traditionally a highly competitive market for bedding products.

For the second quarter, Casper reported a strong 45% year-over-year growth rate on the top line. That compares favorably to 20% growth in Q1, 18% in Q4 2020, and a decline of 3.3% year over year in Q3 2020. "Our momentum remains strong, and our brand is resonating with consumers, who are both spending more time at home and assigning greater value to rest and wellness," CEO Philip Krim said in the Q2 earnings report. 

2. Casper is gaining market share

Casper was a fast-growing business before the pandemic. It launched the original Casper mattress in 2014 and reached $169 million in revenue by 2016. Through 2020, Casper generated $497 million in revenue for a compound annual growth rate of 31% over those four years. 

The global consumer mattress industry grew 12.8% per year from 2014 through 2018, according to the Frost & Sullivan Assessment. Between those four years, Casper went from an unknown brand to pulling in $358 million in revenue, and it still has momentum. Analysts expect Casper to report $603 million in revenue for 2021, which would represent an increase of 21.5% over 2020. 

3. Low expectations

Despite strong momentum on the top line, the stock price is down nearly 25% year to date. While Casper's profitability has improved year over year, its net loss has widened sequentially from $21.2 million in Q1 to a loss of $33.7 million in Q2. 

Casper is dealing with higher transportation costs and other inflationary pressures that are delaying management's plan to move the business toward profitability. While inflationary costs are not showing signs of going away anytime soon, these headwinds are creating an opportunity to buy this growing consumer brand at a steep discount.

Casper's current price-to-sales (P/S) ratio of 0.33 is down from the 0.60 sales multiple it was trading for earlier this year. That's pretty cheap even for a company that is still working to strengthen its bottom line.

CSPR PS Ratio Chart

CSPR PS Ratio data by YCharts.

Competition is one reason to avoid the stock

The reason why Casper trades at such a low P/S valuation to begin with is that selling mattresses is a cutthroat business that historically doesn't generate a high profit margin, although large players like Tempur Sealy (TPX 3.41%) and Sleep Number (SNBR -1.43%) have experienced improving profitability over the last few years.

If you've shopped for any bedding products lately, you're well aware of the choices consumers have. There are several brands competing in the mattress market, including Tuft and Needle, Leesa, Helix, and Saatva, in addition to the established players like Sealy.

On the one hand, Casper's success among all this competition reflects the opportunity for more growth, with an industry tailwind pushing up demand for sleep products. But it also makes it very difficult to choose winners and losers with so many companies copying the mattress-in-a-box business model. It forces these companies to compete on price and spend heavily on marketing to win new customers, which is why Casper is not earning a profit.

If you buy, keep Casper on a short leash

At these low valuation levels, Casper might be a good contrarian investment, but investors should be quick to push the sell button if Casper fails to make progress with achieving sustainable profitability. For that, investors should monitor the company's performance in selling accessories and expanding the product line to gain more repeat customers.