We’re tempted to make CRCT a Best Idea long on last night’s print and after-hours selloff. The print was admittedly noisy, with a three-cent miss on the headline. But what’s really making the stock sell off is the mix of revenue. Connected machines and subscriptions both came in ahead – which is bullish. It’s Accessories – which is a proxy for how much people are using the printers -- disappointed on the margin. In fact, management said that the number of crafting projects by users during the quarter came in below plan. Combine that with the fact that inventories are +150% in the quarter, and there’s your big bear case. Keep in mind that this is a razor blade/razor model, and fewer projects metaphorically equates to a trend where dudes start shaving less and growing out their beards = fewer blades (Accessories) needed. We think that people are thinking that CRCT is the next PTON, where demand will hit a wall and the stock will sell off dramatically. We don’t think that’s the case. With PTON there’s a shift back to ‘normal’ where people are going to gyms in addition to using their bike. But we don’t think that people who are enthusiasts in the Crafting space are simply going to turn their backs on their hobby. Management guided to ~2mm net new users for the year, which we think is very doable number. That equates to about 600k adds in 4Q. We don’t think that the inventory CRCT has on hand is an accident. The company deliberately pulled as much inventory forward as possible due to supply chain issues, which is prudent heading into holiday season – which is CRCT’s biggest seasonal selling period. People won’t give management credit for that today – they’ll penalize the company – even though management is talking about 4Q price increases, which is hardly a statement indicating ‘too much supply’. It was a very smart move how we see it to gain shelf space from competition that simply can’t deliver orders. Keep in mind that each machine has a 4-7 year life. Once it is sold, it gets the person into the flywheel to drive higher margin businesses over a TREND and TAIL duration.
The big question is around next year’s net new users, which we have coming in at 1.5mm (vs 2mm this year). The bad news is that the trend is slowing – even though that level is extremely robust compared to pre-pandemic levels. The good news is that the company is shedding the marginal new sub and will incrementally attract a power user, which suggests an acceleration in higher margin Accessories and Subscriptions – likely in 2Q/3Q of next year. That’s when the ‘growth is slowing and the multiple is too high’ narrative ends, and once we’re within one quarter of that inflection we likely move this name from our Long Bias list up to being a Best Idea Long. For now we’re taking the name higher on the Long side of Position Monitor given today’s selloff.
We’re actually taking our estimates UP on this print over a TAIL duration. The reality is that over our 5-year modeling horizon we have margins going from 17% this year up to 27% by year 5. That results in a LOT of cash flow. We’re assuming that the company more than doubles its capex to facilitate international expansion, but that leaves a lot of capital to repo stock (CRCT is debt free). We have the company buying back $200mm-$300mm in stock annually at a price as high as $75, where we think it trades over a TAIL duration. That takes our EPS estimate from $2.50 up to $2.70 (a full $1ps, or 60%, ahead of the Street) – suggesting that the stock is trading at about 8x that number today. That compares to the 25x-30x the stock trades on NTM earnings right now. Even if we assume multiple compression and the name trades at 20x a more mature earnings base, we get to a $55-60 stock over a TAIL duration.
The punchline here is that the bears will continue to punish this name while the top line slows and we revert to a more normalized post-pandemic level. But we don’t think the model will crash like PTON. We should see sales and margins stabilize and inflect by 2H of 2022, particularly as International begins to accelerate more meaningfully (it was 12% of sales this quarter vs 8% in 2Q). In the end, our sense is that we’ll never know if our out-year $2.70 will happen, because at today’s valuation this company is setting itself up to be acquired – which is something that perhaps all the insiders that are buying know about, and the ~70% of the float that’s short (when you include insider ownership) simply isn’t planning for.
