Since the onset of the novel coronavirus pandemic, at-home activities have been gaining traction. People are increasingly looking for sources of entertainment amidst the need for social distancing. The rapid growth in live streaming, online gaming and gambling are just few examples. The at-home fitness industry has also witnessed healthy growth.
Cricut (CRCT) was listed in March 2021 at $17.8 per share. The stock has nearly doubled from listing levels and trades at $35.5. The stock price action does not seem surprising, considering the fact that Cricut is a creativity platform that enables users to turn ideas into professional-looking handmade goods. The company’s business growth has accelerated through the pandemic and the stock still seems to be flying under the radar. (See Cricut stock charts on TipRanks)
Strong Financials Make Cricut Attractive
For Q1 2021, Cricut reported healthy numbers, which support the recent stock upside. The company’s revenue for the quarter was higher by 125% on a year-on-year basis to $324 million. Further, the company’s EBITDA was $69 million, which was higher by 231% on a year-on-year basis. Importantly, the company’s EBITDA margin for Q1 2021 was 21.2% as compared to an EBITDA margin of 14.4% for Q1 2020.
In addition to these headline numbers, there are other positives to talk about.
First and foremost, the company’s total subscribers as of Q1 2021 were 4.9 million. Additionally, there were 1.6 million paid subscribers. Therefore, 33% of the company’s total users were paid subscribers. Also, paid subscription growth on a year-on-year basis was 118%. If this growth sustains, Cricut is well positioned for improvement in EBITDA margin.
Further, subscription average revenue per user was higher by 38.3% at $9.96. Similarly, accessories and material average revenue per user was higher by 15.9% at $29.45. If average revenue per user continues to accelerate, that will be another factor likely to boost EBITDA margin and cash flows.
Additionally, Cricut shifted its machine manufacturing from China to Malaysia. This will help in tariff reduction and potentially contribute to margin expansion.
For Q1 2021, Cricut reported cash used in operations of $21.9 million. However, this was primarily due to a surge in inventories. If the company’s hardware sales remain strong, coupled with growth in average revenue per user, Cricut is positioned for healthy cash flows in the next few years.
Growth Acceleration Factors
It’s also important to talk about factors that are likely to ensure sustained top-line growth.
The key factor is likely to be geographical expansion. To put things into perspective, Cricut reported international revenue growth of 253% in Q1 2021.
The company has already expanded its team in the Middle-East, Africa and Asia. At the same time, Cricut is targeting new markets like Mexico, the Nordics and Spain. According to the company, the total addressable market globally is 402 million.
Even if 10% of the addressable market translates to subscribers, there is significant headroom for subscription revenue growth.
It’s important to note that the company has a strong cash buffer of $337 million. This will allow the company to pursue aggressive global expansion.
The cash buffer provides scope for product expansion. For example, Cricut recently launched a machine accessory that allows users to create professional-looking personalized mugs. Over the long-term, the company has a target of spending 7% to 8% of revenue on research and development. This is likely to ensure continued product development.
Wall Street’s Take
According to TipRanks’ analyst consensus rating, CRCT stock comes in as a Strong Buy, with 4 Buy and 1 Hold ratings assigned in the last three months.
As for price targets, the average Cricut price target is $33.6 per share, implying around 4.22% downside potential from current levels.
Concluding Views
Cricut is on a high-growth trajectory and the company’s global expansion plan is likely to ensure that strong growth sustains.
Furthermore, the business model can deliver steady EBITDA and cash flow. Cricut has guided for long-term EBITDA margin in the range of 17% to 20%. As cash flows swell in the coming years, the stock can continue to trend higher.
Therefore, it seems that current levels are attractive from a medium to long-term investment horizon.
Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
