One of the most unique and rapidly growing consumer-oriented companies to come out on the market in recent years has been Cricut (CRCT). The company’s namesake Cricut Maker, not to mention its portfolio of other properties, has seen tremendous fanfare and consumer adoption that has led to a surge in shareholder value for the company’s early investors. Even recently, that growth has continued, but more recent data provided by management suggests some pains the business is experiencing. Add into this the fact that the company’s share price is rather lofty, and normally, it would be a recipe for losses to occur. But after seeing the stock fall significantly in recent months, shares are probably priced at levels that are appropriate and that indicate further upside potential moving forward if revenue continues its ascent.
Mixed results as of late
The last time I wrote about Cricut was in an article published in October of 2021. In that article, I highlighted the company’s rapid growth and indicated that future growth should continue at a nice rate. However, I also said that shares of the company were trading at a rather high price that may not make sense for many investors. Ultimately, this led me to rate the company a neutral prospect as I felt that the good coming from the growth might be just enough to offset the high price at which shares were trading. Sadly, it seems I was a bit off the mark on this one. Since the publication of my article, shares have generated a loss of 30%. That compares to a 4% decline experienced by the S&P 500.
At first glance, this may lead investors to think that the company experienced a downturn because of poor fundamental performance. But in at least one way, the company continued to thrive. Sales in the third quarter of the company’s 2021 fiscal year, the only quarter for which data is currently available that was not available when I last wrote about the company, came in at $260.09 million. That represents a significant increase over the $209.01 million generated in the third quarter of the company’s 2020 fiscal year. As a result of this, sales for the full first nine months of 2021 came out to $918.40 million. That dwarfs the $588.06 million generated the same timeframe one year earlier.
The company has benefited on its top line from a number of things. But the most telling indicator of the company’s health would be the number of users on its platform and the number of paid subscribers the company has. On this front, the picture for the business continues to improve. As of the end of the latest quarter, for instance, the company boasted 5.73 million users. That is up from the 3.68 million reported one year earlier and it compares favorably to the 5.37 million the company had in the second quarter of its 2021 fiscal year. Paid subscribers have also done well, rising from 1.16 million in the third quarter of 2020 to 1.81 million in the third quarter of 2021. Though it is worth noting that the increase to the third quarter from the second quarter was not all that great. The company’s net subscriber growth during that time frame was just 49 thousand. But any growth should be perceived as a positive when evaluating a company.
Where the pain really occurred was when it came to profitability and cash flow. In the latest quarter, the company generated profits of just $30.01 million. That stacks up against the $45.21 million generated in the third quarter of 2020. Operating cash flow plummeted, falling from $72.14 million to turn negative to the tune of $77.80 million. Though if you adjust for changes in working capital, it would have just declined from $50.54 million to $45.22 million. And finally, EBITDA dropped from $60.99 million to $42.73 million. Despite the rise in sales, what really hurt the company is that it experienced margin compression across the board. Its profit margin on its connected machines shrank from 22.9% to 14.5%. On accessories and materials, margins shrank from 43.4% to 37%. Even subscriptions experienced compression, as they declined from a margin of 90.4% to 88.9%. This ultimately means less money going to the company’s bottom line.
It also doesn’t help that the high margin accessories and materials portion of the business saw revenue climb just 2% year over year. This means the company relied more heavily on the low-margin connected machines in order to generate a profit, and that is not what investors should want. Either this means that consumers who are utilizing these devices are using them less, or the company is competing with lower-cost competitors creating generic alternatives to its own name-brand accessories and materials. It probably is a mixture of the two, which is not great for investors in the long run.
It is unclear what the future holds for a company like Cricut, but we do know that if we annualize recent performance to apply to the rest of the 2021 fiscal year, then shares are trading at lower levels than when I last wrote about the business. The price to earnings multiple stands now at 20, down from the 25.8 when I last forecasted financial performance. The price to operating cash flow multiple has dropped from 22.3 to 15.3. And the EV to EBITDA multiple has declined from 17.6 to 13.7.
At this moment, Cricut is in an interesting spot. The company continues to grow its top line but its bottom line is suffering. Long term, profits and cash flows are far more important than revenue. The fact that the company sold a lot more in its connected machines line is encouraging because it suggests that there could still be demand out there for its devices. But it was discouraging to see margins contract across the board and for the sales associated with accessories and materials to barely rise year over year. This creates a mixed picture that is difficult to decipher. One thing that is certain is that investors who are bullish about the company’s growth likely don’t have to worry about shares being overvalued if they are correct in their assessment. Shares are trading at levels now that are indicative of a company that would not generate strong revenue expansion. So for those who believe the growth story is not over, now might be a great time to buy in.