What's the Deal With Casper Sleep Stock?

While some newly public companies turn out to be golden eggs for investors' portfolios, others provide a valuable lesson on why it pays to tread carefully when investing in IPO stocks. This segment of Backstage Pass, recorded on Nov. 15 and featuring Fool contributors Danny Vena and Rachel Warren, illustrates one such cautionary tale. 

Danny Vena: Rather than talk about a company that I think you should invest in, I want to talk about an IPO company that is a cautionary tale. I saw a headline this morning that blew me away. I'm going to share my screen here.

You may have heard of one of the pioneers of the mattress-in-a-box e-commerce trend Casper (CSPR). Casper had the idea of rather than going to a store to buy a mattress, maybe you could just order one. We'll ship it to you in a box. You can set it up for yourself. You can do away with a lot of the costs involved with retail stores. Ergo, the mattress-in-a-box trend was born.

Casper, at some point, decided that they wanted to raise some more money so they could expand their operations. Guess what, they thought maybe it would be a good idea if we go into physical retail as well. Let's open up some stores for our mattress-in-a-box. I wanted to highlight this. In the nine months leading up to its IPO, Casper lost $67 million, which was 5% worse than the prior year period.

Their revenue was up to $312 million. It's up about 20%, so not really stellar numbers. This is not a high growth software-as-a-service company where you see those losses and go right, but we understand there's heavy costs upfront, and then later on down the line, more of that revenue is going to drop to the bottom line. 

No this is a company selling mattresses, essentially. One of the things that was a red flag at the very beginning was they originally said, we're going to price our shares between $17 and $19 a share. What we've seen a lot lately is those numbers escalating as you get closer to the IPO. Not in this case.

They said $17-$19 a share, which would've had a $1.1 billion valuation. They slashed that down to $12-$14 a share range, and they eventually went to the lower end of that range, so that valued the company at about $500 million. You can see that investors were not all that excited about the company. They've had some problems.

They blamed those problems recently on supply chain disruptions and inflation. I would argue that a company that made its name by selling mattress-in-a-box, and also by taking these mattresses and selling them at other retailers, maybe should not have, in the midst of a pandemic, decided that they wanted to go further into brick-and-mortar retail.

We go to the next slide here. In the most recent quarter, their revenue grew about 27%, but their net loss worsened. Now not only is their net loss worsening but instead of being down 5%, now it's down 60%. So it's just going from the frying pan into the fire. Just a couple of quotes from their most recent earnings press release.

"Ongoing industrywide supply chain challenges are resulting in sustained inflationary pressures across the industry, impacting our ability to meet demand effectively and efficiently and impairing the company's liquidity position."

That sounds like what every other CEO who has a failing business right now is saying either [LAUGHTER] on their press release or on their conference call.

Now what has happened is the company is being taken private. They're being taken private at essentially half of what their value was at IPO.

Rachel Warren: Oh, man [LAUGHTER]

Danny Vena: So now their IPO cut their value in half, and now they're being taken private at half of what their IPO value was. I saw a headline that was on CNN on the IPO day, and essentially, they're saying, this is already a dumpster fire [LAUGHTER]

Now you have the company, they are being taken private. The stock is up, I think it's like 89% today or something because it just had gotten hammered down so badly. Essentially I bring this up because we talked last week about IPOs are hard.