Expanding Technology And Sleep Apnea Initiatives Will Open New Opportunities

Key Takeaways

• Strategic partnerships and technology licensing initiatives may diversify revenue streams and improve margins by leveraging Sleep Cycle's technology in various industries.
  
• Entry into the sleep apnea market and ongoing medical certifications could address significant unmet needs, potentially boosting revenue and earnings.
  
• Exposure to currency fluctuations and increased costs from marketing and new revenue streams could impact Sleep Cycle's revenue growth and net margins.

Catalysts

Engages in providing sleep tracking applications in Sweden.

• Sleep Cycle's dedication to enhancing its proprietary technology platform and expanding its offerings beyond the app could unlock new revenue streams and lessen dependence on app downloads, improving long-term revenue growth.
  
• The company's partnership strategy, including better terms with Wellhub and ongoing discussions with potential partners, could result in stable and incremental revenue, boosting net margins by leveraging the technology with other brands and platforms.
  
• Sleep Cycle's entry into the sleep apnea market with ongoing medical certification efforts could capture a significant unmet market need, potentially leading to substantial new revenue sources and enhancing earnings.
  
• The launch of Powered by Sleep Cycle to license their AI sound model and audio technology to third parties could diversify income sources and improve the operating margin by tapping into various industries beyond direct-to-consumer sales.
  
• Strategic focus on reducing churn through product improvements, such as sleep staging features, and expanding market share organically could stabilize subscriber base growth, reducing volatility in earnings and supporting steady revenue growth.

Sleep Cycle Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sleep Cycle's revenue will grow by 15.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.7% today to 20.5% in 3 years time.
• Analysts expect earnings to reach SEK 82.2 million (and earnings per share of SEK 3.97) by about May 2028, up from SEK 64.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, up from 9.6x today. This future PE is lower than the current PE for the SE Software industry at 33.7x.
• 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 6.24%, as per the Simply Wall St company report.

Sleep Cycle Future Earnings Per Share Growth

Risks

• The macroeconomic environment is causing a decrease in the number of downloads, potentially affecting future revenue growth despite the efforts to gain market share.
  
• A decline in Average Revenue Per User (ARPU) due to weaker new sales and FX fluctuations could negatively impact overall revenue growth.
  
• Increased marketing and investment in new revenue streams are raising costs, which might affect net margins if not matched by revenue growth.
  
• The process for obtaining medical certification for sleep apnea screening is lengthy and costly, creating uncertainty in future earnings if the certification is not granted or delayed.
  
• The company's exposure to currency fluctuations creates risks for revenue and profits, especially with significant revenue generated in U.S. dollars while costs are recorded in Swedish krona.

Valuation

• The analysts have a consensus price target of SEK41.667 for Sleep Cycle based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK55.0, and the most bearish reporting a price target of just SEK26.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK401.2 million, earnings will come to SEK82.2 million, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of SEK30.7, the analyst price target of SEK41.67 is 26.3% higher.
  
• 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.