Over the last 10 years, few stocks have performed as well as Apple and Microsoft. The stock prices for these two tech giants are up 975% and 828%, respectively, compared to the 162% return for the S&P 500. And many investors would rightly credit growth for these market-beating returns.
One company that can claim far greater growth in revenue per share than either Apple or Microsoft is mattress company Sleep Number (SNBR -7.05%). And yet, if you invested $1,000 in Sleep Number stock 10 years ago, you'd have just $1,006 today. The stock underperformed the market by a wide margin even though it's beating Apple and Microsoft in revenue-per-share growth, as the chart below shows.
SNBR Revenue Per Share (TTM) data by YCharts.
Let's look at why Sleep Number stock has underperformed the market and see whether Sleep Number stock will underperform over the next 10 years as well.
Why Sleep Number stock underperforms
Growth is extremely common among stocks that perform well over long time periods. This statement is affirmed by multiple studies. For example, among the top 25% of stock performers, 60% of total shareholder returns over 10-year periods was due to growth, according to a 2006 study from Boston Consulting Group (BCG).
The BCG study also found that changes in a company's share count had a part to play. For those unaware, companies offer thousands or even millions of shares. And each share represents a small percentage of the underlying business. However, the share count isn't static -- it goes up and down, affecting the company's value. Therefore, looking at per-share growth is also important, and it's why I compared Apple and Microsoft to Sleep Number above.
The chart below shows that Apple and Microsoft's trailing-12-month revenue growth has marginally outgrown Sleep Number's over the last 10 years. However, through share repurchases, Sleep Number lowered its share count by a whopping 60%, which boosted its per-share revenue growth.
SNBR Revenue (TTM) data by YCharts.
The biggest disparity when comparing Sleep Number with Apple and Microsoft is profitability. Whereas the two tech giants grew earnings per share (EPS) more than revenue per share, Sleep Number's EPS growth is far below its revenue per share growth.
SNBR Revenue Per Share (TTM) data by YCharts.
It's worth noting that Sleep Number's EPS is prone to periods of underperformance because the mattress industry is cyclical. Mattress sales don't typically come with recurring revenue. And Sleep Number's mattresses are high-quality with long warranties, meaning repeat customers are naturally infrequent.
In 2022, as consumer demand cooled, Sleep Number's diluted EPS fell a whopping 74% compared to 2021. And it's why Sleep Number stock is lagging the market right now, in my view.
This steep drop-off in profitability has happened to Sleep Number before during periods of waning consumer demand. And it's why right now is the third time in the last 25 years that Sleep Number stock has fallen by 80% or more.
Is Sleep Number a good stock today?
The market might be blowing Sleep Number's slump out of proportion, which means the stock is discounted. Consider that even if demand fell for its mattresses, the company's net sales in 2022 were its second highest ever, down only 3% from record net sales in 2021. And it expects to earn EPS of $1.25 to $2.00 in 2023, meaning Sleep Number stock currently trades between 11 and 17 times this year's earnings.
Moreover, Sleep Number stock looks even cheaper from a cash-flow perspective. In the first quarter of 2023, the company had $19 million in cash from operations, and it expects $100 million for the whole year. This means it trades at just 5 times this year's expected operating cash flow, which is quite inexpensive.
Looking at management's guidance through 2026, Sleep Number's profitability is expected to rebound to far more normal levels, while sales continue to creep moderately higher. And if that happens, I believe it's very likely that Sleep Number stock will outperform the market from where the stock trades today.
Circling back to the intro of this article, it's true that Sleep Number stock underperformed the market average over the last 10 years. However, investors who purchased shares during previous pullbacks did much better. And buying this dip in Sleep Number could also turn out well.
To be clear, there is admittedly one glaring negative with Sleep Number right now: While it has repurchased many shares over the last decade, no repurchases are planned this year. The company's debt is elevated at $470.6 million compared with a cash position of just $1.5 million. Therefore, its cash flow will be preserved for the business rather than rewarding shareholders with repurchases while the stock is cheap That's unfortunate.
That said, Sleep Number's profits are down due to the cyclicality of the business. But the brand remains strong, and profits should rebound, which could make this a dip worth buying for some investors.
