Rising Smartphones And AI Sleep Insights Will Transform Digital Health

Key Takeaways

• Proprietary AI, organic user growth, and medical certification position Sleep Cycle for leading B2B partnerships and rapid adoption in expanding health and wellness markets.
  
• Strong cash reserves and disciplined costs enable substantial product investment, boosting earning power and resilience against competition.
  
• Declining user metrics, intensifying competition, and rising regulatory and expense pressures threaten Sleep Cycle's core business model, long-term profitability, and prospects for sustainable growth.

Catalysts

Engages in providing sleep tracking applications in Sweden.

• Analyst consensus anticipates incremental benefits from Powered by Sleep Cycle through technology licensing, but this could far exceed projections as Sleep Cycle's proprietary AI model-already trained on over 3 billion nights-becomes the gold standard, unlocking exponential, high-margin B2B deals across consumer electronics, telehealth, and wellness markets, dramatically accelerating both revenue and margin expansion.
  
• Analysts broadly agree medical certification for sleep apnea could open up new markets, but this likely understates the potential; Sleep Cycle is positioned to be first-to-market as a fully phone-based screening tool, enabling fast adoption within global healthcare payer networks and employer wellness programs, with transformational impact on recurring revenue and stickier, higher-value B2B partnerships.
  
• With organic acquisition rates vastly outpacing peers and over 80% of new users coming from organic channels, Sleep Cycle can sharply reduce customer acquisition costs, supporting sustained premium margins and margin expansion as the broader health and wellness market grows increasingly digital and trust-centric.
  
• As demand for sleep optimization becomes embedded in daily health management-driven by increased remote work, smartphone adoption, and rising consumer prioritization of wellness-Sleep Cycle stands to dramatically expand its global user base in underpenetrated markets, capturing accelerating top-line growth and operational leverage from fixed cost scaling.
  
• The strong cash position and demonstrated cost discipline-combined with rapid innovation cycles and proven ability to win market share in contracting markets-give Sleep Cycle a unique ability to invest heavily in product and data science without margin compression, fueling outsized earning power and resilience relative to competitors.

Sleep Cycle Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Sleep Cycle compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Sleep Cycle's revenue will grow by 19.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 24.7% today to 17.9% in 3 years time.
• The bullish analysts expect earnings to reach SEK 80.0 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 bullish analyst cohort, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, up from 8.9x today. This future PE is lower than the current PE for the SE Software industry at 34.6x.
• 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 6.43%, as per the Simply Wall St company report.

Sleep Cycle Future Earnings Per Share Growth

Risks

• The company reported a year-over-year decline in new downloads and a loss of 14,000 paying subscribers compared to the previous quarter, reflecting market-wide softness and a shrinking top-of-funnel that could negatively impact long-term revenue growth if the trend persists.
  
• Sleep Cycle acknowledges that much of the demand for sleep technology is shifting outside of stand-alone sleep apps and toward native features in wearables and platforms, exposing it to the risk of platform consolidation and feature cannibalization, which may significantly reduce its total addressable market and depress future revenues.
  
• Intensified competition from built-in health and sleep functionalities on iOS and Android, as well as increasing advances from global tech giants like Apple, Google, and Samsung, threatens Sleep Cycle's ability to retain users and maintain pricing power, potentially resulting in compressed margins and lower profitability in the long run.
  
• The company's investments in marketing and ongoing development of new ventures, such as the sleep apnea project and platform partnerships, have increased operating expenses at a time when ARPU is declining and the market is soft; if these bets fail to deliver incremental revenue, net margins and earnings could deteriorate.
  
• Heavy reliance on data collection, planned entry into regulated health segments, and ambitions for medical certification expose Sleep Cycle to greater regulatory and compliance risks related to personal data privacy and health standards; increased costs or restrictions from evolving regulations could reduce net margins and slow future revenue growth.

Valuation

• The assumed bullish price target for Sleep Cycle is SEK49.0, which is the highest 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be SEK445.7 million, earnings will come to SEK80.0 million, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 6.4%.
• Given the current share price of SEK28.6, the bullish analyst price target of SEK49.0 is 41.6% 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.