Taylor Harris: Good afternoon, everybody. I'm Taylor, this is Dylan. This week Casper
IPO-ed and that's a big deal. Dylan Lewis: Yeah. So, we had all these huge
IPOs in 2019, right, Lyft, Uber. And Casper is one of the first ones from the unicorn
class to go public in 2020. Harris: What's the unicorn class?
Lewis: All of these companies that are worth over a $1 billion.
Harris: Okay. So, you made more than $1 billion, you’re a unicorn?
Lewis: Yes. Well, if you are valued at more than $1 billion, you’re a unicorn. And so,
there's all this cachet to being a company that has raised all this funding in private markets,
kind of, become a darling of the venture capital and private equity world,
earned that billion-dollar valuation. Harris: Cool. And Casper is special among
the unicorns or is it special? Lewis: TBD, we have to see how it does as
a public-traded company. But last week they went through the effort of actually listing
their shares on a public exchange. So, they IPO-ed their initial public offering and now
anyone can access their company; they can buy shares if they want to. Now, the reason
this is noteworthy is, originally, they were trying to raise money at about $17 or $19
a share as their valuation, that would put them at about a $700 million to $750 million valuation.
Now, they were a unicorn -- Harris: $750 million market cap valuation.
That’s a unicorn status. Lewis: A unicorn. So, they're already taking
that haircut. Now, when you go through an IPO, you go through this roadshow process.
And so, you have all these people that are looking and saying like, “Okay, we might
want to buy shares, but we got a look at your business and kind of get a sense of how you're
doing and whether we're interested.” During that process, it seems, Casper couldn't drum-up
enough interest. And so, when that happens, they have to say, “Well, we were trying
to raise equity at this price, it turns out we need to lower our standards a little bit
to attract investors.” So, they had to go in at a lower price. So, they actually IPO-ed
at about $500 million valuation, which is half-a-unicorn, [laughs] which nobody wants
to see what half-a-unicorn looks like. [laughs] Harris: [laughs] You know, it could be interesting.
So, what is the big story with it? Why are they half-a-unicorn now?
Lewis: So, I think the reason people paid attention to it so much was it felt a lot
like the WeWork story. Harris: Okay. Yeah. Not a good story.
Lewis: No, not a good story. And so, quick refresher, another highly-valued highly-prized
private company that was about to go public -- they didn't even make it public --
faced the scrutiny of a company that would be making that public entrance. All these people looking
at their books, deciding whether or not they want to invest. They went from an implied
valuation of about $48 billion to about $8 billion.
Harris: Oh, that's a hit. Still a unicorn? Lewis: Well, yes. So, they’re still a unicorn,
probably, we think. But that scared a lot of people because all these private investors
-- venture capitalists, private equity -- have been putting money into these businesses without
really the public knowing what their books look like, how successful they were,
kind of closed off. And a lot of them were funding multiple rounds for these companies. And so,
they were basically propping up the owned price of their investments. So, what's the
story underneath the hood with Casper? What's going on that makes it --
Lewis: Not good? Harris: Not good. Yeah. I think understand
somewhat the story of WeWork somewhat being unable to deliver on the promise of the business,
the complexities of real estate. What about mattresses?
Lewis: And we have this wonderful example to illustrate, I think, exactly what's wrong
with this company. So, if we're looking at what this company makes in revenue --
we’re going to look over the first nine months of 2019, because that's what we have in terms
of available recent financial documents. So, they made just about $400 million in gross revenue.
Now, before we take anything else into account, 20% of that was returns and
promotional stuff. Money that came back. So, people basically being like, “I ordered
this mattress, I don't know if I want this mattress.”
Harris: And that's a pretty big part of a lot of these mattress companies,
marketing campaigns, like, try it out 30 days, a 100 days.
Lewis: It’s crazy. And so, some of that is abuse. Some of that is people being, like,
I can do this, have a summer sublet and then return it and wipe my hands free. Some of
that's also people probably just not liking the product. And some of it is then discount.
So, before we get to anything else, 20% of their revenue, out the window, because the
product is unusable. And you can't really do anything with a used mattress.
Nobody wants one, right? Harris: Nobody wants them and they're really
hard to get rid of. Lewis: Yeah, as it turns out. And so, boom!
We're going to take 20% of that little mattress PB&J, you're going to eat that.
Harris: I’ve been waiting. Lewis: You’ve just been staring at it.
It's like your favorite snack. So, this is like the special you're going to do.
Harris: It’s a jamwich. Is that about 20%, 20% is a fifth, right?
Lewis: It's close enough. So, now we're down to something close to about $320 million.
We're going to take half of that, that's the cost of goods sold. So, that's everything
that goes into actually making a mattress. So, all the products, all the inputs that
go into making the mattress, all the products that they sell.
Harris: So, this is not pure profit, we're talking -- Lewis: Yeah, we're just working down the cost here.
Harris: The money it costs just to get everything out the door before we're even pulling money in?
Lewis: Exactly. So, 40%, 50% of that. Harris: 50% of this?
Lewis: Yeah. You should be going with the water. I'll do the talking while you're figuring
that out. [laughs] Okay. So, at this point, we've taken into account returns, we've taken
into account the cost of actually making the product. So, the next thing we have to take
into account is the cost of actually selling the product and marketing the product.
You need to do that if you’re going to be able to sell any mattresses. And in addition to that,
you're also going to have all these general expenses.
Harris: Yes. Cost of doing business. Lewis: Exactly. Overhead. So, people that
don't sell things, that are also part of business. Accountants, people in finance, what have you;
that's $220 million. Harris: I mean, that's nearly half of the
$400 million, oh, God! So, that's a huge chunk. Lewis: And in our case, that would exhaust
the rest of that sandwich. Harris: Do I have to exhaust the rest of the sandwich?
Lewis: I'd like to see you exhaust the rest
of the sandwich. Harris: I would, but.
Lewis: In fact, it would more than exhaust the rest of the sandwich. The reality is,
if you're looking at the operating expenses for this business, it's more than they're
bringing in. And a lot of that is driven by the fact that they have so many refunds and
so much promotional spend going into the mattress sales. And one of the big problems is, I mentioned
that 20% number before, but it was actually lower in past years. So, it's 15% and it's
trended up over the last couple of years, which says that either they're being too generous
with their return policy, they're promoting too much and they're offering too many discounts
and things like that, because the environment is getting more competitive. I see you struggle!
Harris: Because it’s getting more competitive.
What's the future look like if this huge suck on the business is getting bigger over time
and they're already operating at a loss, what's the benefit for investors in the long-term
even of that? Is it hope that they'll get returns down or is it hope that they'll become
more efficient somewhere else in the business? Lewis: Ideally, returns come down, but most
investors are willing to afford a company losses, if the growth story stays intact.
Harris: Yes. Just like Amazon was operating at a loss for ages.
Lewis: They practically -- I mean they made a business out of it, that's exactly what
they did. In the case of Casper, they were growing their business pretty rapidly and
people were willing to accept those losses. In 2018, they grew their business about 40%
year-over-year. Harris: Okay. That seems like a lot.
Lewis: That’s a lot. The problem is, in the first nine months of 2019 that dipped
to 20%, which is a screeching halt from where they were.
Harris: Yes. Is there something that accounts for that?
Lewis: A lot of people think that it comes down to the fact, there are more people in
the marketplace. Harris: Okay. Fair enough.
Lewis: And so, you have all these other people that have looked and said, “Wow, they disrupted
the mattress market by going direct-to-consumer, they cut down their cost a little bit,
they don't have the overhead and all the expenses of running the stores and everything.
That's a pretty good idea, we should do that too.” And the number of people doing that has exploded
over the last five years, which makes it a lot harder for them to own this category that
they've kind of created. Harris: I see. So, were they one of the --
you know, there are so many that the market has been saturated... Every podcast I listen to
is trying to sell me a mattress. I didn't realize they were the first --
Lewis: They are one of the first, but they're the name that everyone thinks of. They have
that brand identity and that association that's so powerful. And that's really what they're
trying to pitch people on at this point is, we are the go-to name, we are what people
think of in this market. It's hard to say whether that is enough for investors at this point.
And based on where they funded and where they IPO-ed, it seems like a lot of
people aren't buying that story. Harris: Fair enough. Before we wrap up,
what's the big number to take away this week? Lewis: The big number this week for me is
43%. So, there was a survey done recently by an online organization and they found that
43% of Americans are expecting to give up on their New Year's resolutions by February.
Harris: Heartbreak. Lewis: [laughs] Which is not great.
That's basically a month in at this point, and it's almost half. And so, the reality is most people
are setting fitness goals. That's one of the most common things.
Harris: The hardest one. Lewis: Oh, yeah, I mean, we can both attest
to that, I think. But also, a lot of people are setting financial goals. And so, if you
look at the most common goals that people are setting around the New Year, it tends
to be, save money, pay down debt, maybe invest as well. Something like that.
And so, when you look at fitness goals, the struggle is getting into the gym regularly.
I think if you're looking at financial goals, the struggle is doing it consistently.
And so, the idea of saving more, it's kind of this nebulous thing, it's really hard for
people to nail down the behavior that they should be doing.
Harris: What are a couple of tips for somebody who might want to be better?
Lewis: So, being better than the 43%?
Harris: Yeah being -- you know, asking for a friend. How do I keep my resolution to not
let everything go just as soon as I resolve to do it?
Lewis: I've heard a couple of tips for this. And some stuff that I've done in practice
and some stuff that I've read about too. I think the big thing is, rather than saying
things like, “save more money,” set concrete goals that are specific. And say rather than
“I want to save more money,” say, “I'm going to switch my wireless carrier which
will save me $30 a month and over the course of year that'll save me $360.” So, I think
that's a nice tip. I've also heard people do something, where they say, “This isn't
so much my resolution, it's more, it's the year of money mindfulness.” And you adopt
the mantra. And so, instead of, save more money, and you're like, “Oh, what do I do
with this?” It's like you're kind of constantly thinking about, “Okay, what is a better
financial decision to make?” Or rather than saying, “I am dieting,” just say like,
“it's a year of better health, I'm just thinking a little bit more as I'm making my
food decisions.” Harris: “I’m just being healthier, generally,
as much as I can.” I like that. Lewis: It’s a little bit less pressure.
Harris: It's a little bit less pressure. And when you fail, it sounds like, you don't,
you just collapse into a pile of ice-cream and Doritos.
Lewis: Well, that's my Saturday night, so. Harris: Can’t wait.
Lewis: I'll see you there on the couch. Harris: Okay. Dylan, we had a viewer ask a
question, which is, “Can you guys do a video tackling how to value a company and how to
compare its valuations?” Lewis: Yeah. And I think this is in response
to a video we did on market cap. And so, we talked a little bit about this before when
we were talking about Casper and the idea of what the company is worth? And so,
you take all of these shares outstanding that the company has, take its share price,
combine the two, that's how you get your market cap. Now, that's just the total value of the company,
that doesn't really give you a sense of what you're paying in terms of share price for
what the company does. And so, this question is really getting at the idea of valuation.
And what you want to do is take whatever that market cap is and then compare it to either
the company's earnings, if it's profitable, or its sales, if it's not profitable.
And so, you look at things like the price to earnings ratio or the price to sales ratio, which is simply,
market cap or share price divided by earnings or earnings per share.
And then you can compare that to other companies in the industry, you can compare that to the
stock market, you can compare that to the historical averages for that company and you
just get the sense of how it all looks. Harris: Awesome! Thanks, guys, for watching.
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