Sleep Cycle's Revenue Set to Rise 10% with Strong Revenue Model

Catalysts

• Business Expansion Opportunities: The company can leverage its existing data and software to explore new business models—such as transforming its app into a medical device for sleep apnea, monetizing data, or licensing its software as a development kit.
• Macro Trend: A growing societal focus on sleep’s importance supports increased market demand and provides an opportunity for accelerated growth.
• Continued Historical Top-Line Growth: The company has consistently achieved a 10% annual top-line growth historically, and this trend is expected to continue.

Assumptions

• Growth Trajectory: It is assumed that the company will maintain its historical 10% annual top-line growth. Assuming 10% revenue growth in model for upcoming 5 years. (lower than management guidance/financial goals which sets out a doubled revenue in 4-5 years).
• Profit Margin Improvement: Recent quarters (2022–2024) show margins between 20–24%. As the business scales, net profit margins are expected to improve to a range of 25–30%. Assuming 25% profit margin in model.

Risks

• Competitive Threats: The entry of major players like Apple or Samsung into the sleep market could displace the company.
• Market Downturn: A continued decline in application downloads may dampen revenue growth and adversely affect overall performance.

Valuation

• Reasonable PE Range in Five Years: Balancing the current undervaluation and the potential re-rating due to persistent growth and margin improvements, a PE multiple in the range of 20x to 25x appears reasonable in five years. E.g. the range of Garmin's PE ratio is 33.0, and the minimum PE ratio is 14.4. The average PE ratio is approximately 21.67. I am therefore assuming 20X PE in the valuation

To be on the lookout for in the upcoming Q-reports

• Top-Line Growth: Monitor quarterly revenue figures to ensure they align with the projected 10% growth trajectory and any acceleration from new initiatives.
• Margin Trends: Keep an eye on operating and net profit margins to confirm the expected improvement toward the 25–30% range.
• Financial Indicator: Investors should be on the lookout for developments in prepaid accounts receivable, as shifts here may serve as an early indicator of future earnings performance and the recent continued downwards trend needs to be reversed or understood.