Embedded Trackers And Regulation Will Erode Sleep App Margins

Key Takeaways

• Deep integration of free health tracking by major platforms and bundled offerings threatens user growth, retention, and the relevance of standalone sleep apps.
  
• Rising compliance costs and the shift toward medical-grade solutions will squeeze margins and challenge Sleep Cycle's long-term profitability.
  
• Expanding technology platform, strategic partnerships, medical certification pursuit, and operational efficiency position Sleep Cycle for diversified growth, resilience, and long-term wellness market advantage.

Catalysts

Engages in providing sleep tracking applications in Sweden.

• The accelerating integration of free sleep and health tracking features directly into mobile operating systems and wearables by major tech companies threatens to drastically shrink the market for standalone apps like Sleep Cycle, jeopardizing long-term revenue growth and undermining user acquisition momentum.
  
• Intensifying regulatory scrutiny around health data privacy is likely to raise compliance costs and could further restrict Sleep Cycle's ability to collect, process, and monetize user data, compressing net margins and limiting its ability to differentiate with advanced analytics features.
  
• The increasing trend toward bundled digital health offerings from larger platforms risks relegating third-party sleep apps to the periphery, which may lead to higher churn and lower subscription growth, threatening the sustainability of recurring revenue streams.
  
• Long-term subscription fatigue, coupled with app store saturation, may continue to erode average revenue per user and drive up marketing expenditure required to maintain user numbers, resulting in further net margin pressure and stagnant earnings.
  
• Advances in validated medical-grade sleep diagnostics and devices could diminish the perceived value of app-based solutions-even if Sleep Cycle successfully navigates medical certification, significant and ongoing R&D and regulatory costs may outpace any incremental revenue, impairing profitability over the long run.

Sleep Cycle Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Sleep Cycle compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Sleep Cycle's revenue will grow by 14.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 24.7% today to 20.1% in 3 years time.
• The bearish analysts expect earnings to reach SEK 79.9 million (and earnings per share of SEK 3.9) by about August 2028, up from SEK 64.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, down from 9.1x today. This future PE is lower than the current PE for the SE Software industry at 34.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.47%, as per the Simply Wall St company report.

Sleep Cycle Future Earnings Per Share Growth

Risks

• Despite a challenging quarter, Sleep Cycle is demonstrating strong user engagement through steady conversion and annual renewal rates, decreasing churn, and solid retention, which could help maintain or grow its subscriber base and support recurring revenues.
  
• The company's investment in broadening its technology platform through Powered by Sleep Cycle and the pursuit of strategic partnerships could open new high-margin B2B and licensing revenue streams beyond direct-to-consumer subscriptions, enhancing both growth potential and revenue diversification.
  
• Progress toward medical certification for sleep apnea screening introduces material upside opportunities, as regulatory approval would grant access to the rapidly expanding digital health and medtech markets, with significant long-term impacts on revenue and potential margin expansion.
  
• Sleep Cycle's disciplined cost management and operational efficiency are resulting in robust EBIT margins consistently above 25 percent, signaling resilience in earnings even amid short-term market headwinds, which can support sustained net profit levels.
  
• The underlying secular trend of increasing societal interest in sleep health, coupled with the company's proprietary and evolving AI technology, positions Sleep Cycle to benefit from growing demand for wellness and preventative health tools, directly contributing to potential long-term revenue and user base expansion.

Valuation

• The assumed bearish price target for Sleep Cycle is SEK26.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Sleep Cycle's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK49.0, and the most bearish reporting a price target of just SEK26.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK398.2 million, earnings will come to SEK79.9 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 6.5%.
• Given the current share price of SEK29.05, the bearish analyst price target of SEK26.0 is 11.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.