Cricut, Inc. has faced several challenges in the current economic environment, which has put pressure on consumer discretionary spending. This situation is expected to impact demand for Cricut’s main products, including its cutting machines, as well as associated platform services, accessories, and materials.
Business Description
Cricut, Inc. specializes in providing computer-controlled cutting machines for home crafters, enabling users to design and create personalized products. The company operates primarily through two business units: product sales, which accounted for 60% of FY23 revenue, and platform services, which made up 40% of FY23 revenue.
Previously, the business had three segments: connected machines, platforms, and accessories & materials.
In the latest quarter (1Q24), reported on May 7, 2024, Cricut saw total revenue of $167.4 million, down 7.6% compared to 1Q23. The company reported a gross margin of 54.7%, an improvement from 42.3% in 1Q23, and an EBITDA margin of 20%, up from 10.9% in 1Q23.
Net margin also improved to 11.7%, up 670 basis points from 1Q23. Earnings per share (EPS) came in at $0.09, compared to $0.04 in 1Q23.
Negative Business Outlook
The near-term outlook for Cricut remains challenging. Despite positive profitability metrics, the business continues to experience negative growth, with no immediate catalysts for a turnaround. The broader macroeconomic conditions, characterized by persistent inflation and high interest rates, are likely to keep consumer spending subdued.
This environment is particularly challenging for Cricut, as its products are discretionary items with significant price points, ranging from $100 to over $1,000.
The weak macroeconomic backdrop is expected to dampen demand for Cricut’s main product, the cutting machines. A decline in machine sales directly affects the company’s platform revenue, as fewer new customers are added to Cricut’s ecosystem. Several indicators highlight this demand weakness:
- The number of active users has slowed both sequentially and annually.
- User engagement over the trailing 90 days decreased by 5% to 3.5 million.
- Paid subscriber growth has decelerated for seven consecutive quarters, from 35% in 3Q22 to just 3% in 1Q24.
These trends suggest that demand is at an inflection point and could turn negative if macroeconomic conditions do not improve. Management’s comments regarding 2Q24 performance did not provide much optimism, as they noted cautious restocking by retailers and continued soft consumer spending trends.
In addition to macroeconomic challenges, Cricut faces increased competition in its accessories and materials segment. This segment, which accounts for around 33% of the business, is particularly vulnerable to competition from numerous art and craft shops.
The combination of weak macro conditions and competitive pressures is likely to drag down overall growth.
Puzzling Capital Return Program
Cricut’s new capital return program, which includes a $50 million share repurchase authorization, a $0.40/share special dividend, and a new recurring semi-annual dividend of $0.10/share, raises some questions. While this may appear beneficial to shareholders, it suggests that management might not have better alternatives for deploying capital to drive growth.
Instead of reinvesting in the business to spur growth, the company is returning cash to shareholders, which could indicate limited growth prospects.
Valuation
Based on the current analysis, Cricut’s stock appears to be trading at a multiple that does not accurately reflect the company’s ongoing slowdown. With a forward P/E ratio of 24x, the stock is near its historical average, but this valuation seems high given the negative growth outlook.
A more conservative multiple of 18x forward P/E, reflecting the potential downside, implies a share price of approximately $4.
Risks
While the current outlook is challenging, there are factors that could prove the conservative topline estimates wrong. Higher-than-expected sales of connected machines, particularly in new international markets, could drive faster-than-expected growth.
Additionally, improvements in macroeconomic conditions could boost consumer discretionary spending, positively impacting demand for Cricut’s products.
Future Prospects
Cricut’s current challenges are primarily driven by macroeconomic factors and competitive pressures. The company’s ability to navigate these challenges and stabilize demand will be crucial for its future performance. Until there are clear signs of a turnaround in consumer demand and improvement in user metrics, the outlook remains cautious.
The company’s main product, the cutting machines, are discretionary items whose sales are likely to be impacted by pressured consumer spending. This decline in product sales is expected to affect platform subscriptions and demand for accessories and materials.
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Faith is an enthusiastic freelancer and regular contributor to numerous finance blogs, creating valuable pieces to educate individuals on finance and fintech options. As a skilled writer, Faith has created content for diverse industries—if it exists, she’s likely written about it!
