Cricut (NASDAQ:CRCT) may seem like just another hardware business waiting to be knocked off, but this creatively focused platform is attempting to generate an ecosystem that may rival some of the stickiest in the world.
In this episode of Industry Focus: Consumer Goods, join Motley Fool analyst Yasser El-Shimy and host Emily Flippen as they break down this relatively recent IPO and discuss what investors should be considering before adding it to their own portfolios.
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This video was recorded on June 22, 2021.
Emily Flippen: Welcome to Industry Focus. Today is Tuesday, June 22nd and I’m the host of this episode, Emily Flippen. Today, I am joined by Motley Fool analyst Yasser El-Shimy as we take a look at a newly public creativity platform that is encouraging customers everywhere to turn their silliest ideas into very real and viable products, Cricut. Now, this is spelled C-R-I-C-U-T, like cri-cut, but somehow spoken like Cricut. Yasser, this is driving me insane.
Yasser El-Shimy: It drove me insane too. For the longest, I assumed it was pronounced cricket, but apparently not. I guess the logo is a give away with the little ears jumping out of the C. I guess they’re hinting at the Cricut connection, but why they came up with that name, I have no idea.
Flippen: I apologize in advance to all of our listeners if I refer to this business as Cricket throughout the show. I am working off an outline here and it is impossible for me to read this name and not want to say Cricut. But I’ll do my best to pronounce it the correct way, which is Cricut as I found out by going down this rapid whole of very long YouTube videos, where there are all these creative people who are using Cricut products to make fun items, doing tutorial shows. I initially went there to figure out how to pronounce the name, but then I found myself stuck in this YouTube rabbit hole for hours. I’m curious, Yasser, this is a relatively new IPO. The ticker is CRCT. How did you hear about this company?
El-Shimy: That’s a good question, Emily, and I wish I had a more memorable answer for it. This is not a case where someone special in my life has made a gift for me that was personalized using the Cricut machine. I wish I could tell that story. It’s more that, if you know my investing style, I tend to have a soft spot for IPOs, and I have a soft spot especially for smaller companies that have a lot of potential for the future. I periodically just follow the news of everything IPOs, I have my own filters in terms of the companies that I try to get to, and this one crossed my radar and I thought to myself, this is interesting. We’re supposed to be living in a world of increasing personalization, customization, gig work, and e-commerce. A company like Cricut could be potentially the infrastructure upon which much of what is designed and built in this new economy gets done. It definitely piqued my interest. But like you, I don’t know, maybe it’s just a sign of the Millennial investor that whenever we see anything with hardwares, we’re like, “Yeah, I don’t know about that.” So I was like, let’s put this on the backburner for a while. But then they came out with their Q1 earnings, and boy did they just blow it out of the park. Very impressive numbers.
Unfortunately, how they’d taken up possession at the time when I was initially interested, I would have at least doubled my money there, but I didn’t, and here we are. But Cricut is one of those rare breed of companies, I would say, at least for now, that have high triple-digit growth as we saw in their Q1 release, and are profitable at the same time, and pretty much the top dog in the niche in which they operate. The niche in which they operate is a growing space. Given all of the above, I would say it probably should be on any investor’s watchlist, especially growth investments.
Flippen: Well, I’m happy that you have a soft spot for IPOs because I think, as frequent listeners will know, I’m overly harsh, especially on IPOs. I tend to be an expert arbitrary nitpicker, and I did nitpick on this business because if you’re listening to this show and maybe at this point you’ve Googled Cricut, cry cut, and you’ve thought to yourself, “I’m curious about what this business is,” you may have had the exact initial reaction that Yasser and I just mentioned, which is you went to their website and you saw a bunch of hardware and you thought to yourself, “I am not investing in a hardware business.” I had the same thought, but this is really almost Apple-like in its business model. Now, I don’t want to say this is Apple-like in the sense that they have not clearly reached the scale that Apple has and their product is not applicable to every single person on the face of the planet the way that Apple’s products are and were, but it is taking a similar approach to combining the hardware and software model, which makes the business really interesting. Can you explain to us just a quick overview about what Cricut is, what these creativity products are, and how they monetize it?
El-Shimy: I would definitely be happy to do that. Before I do so, I just want to comment here that in terms of the hardware sales, we all still have memories of companies like Compaq computer machines or Kodak, Xerox, and so on. I think we can be excused if we’re a little harsh on hardware companies at least when it comes to picking them. Now, in terms of the business that Cricut does and works in, well, they help people effectively create custom craft projects at home. They have a number of different, effectively printers, I want to say, machines, that help users or artists effectively customize and make personalized, customized products using those printers or those machines. Now, on top of that, they also have a software tool that contains hundreds of thousands of designs and patterns and fonts and so on, that can help with that customization process. So users can pick out what they want and then they upload the designs to Cricut’s machines which are in their homes and then the machine custom cuts out exactly the pattern that the user wants. You can make that pattern, you can apply it to make a physical product. If you ever got something like a custom card or a mug or customized t-shirt from somebody on Etsy or another platform, there’s a good chance they may have used a Cricut machine for that.
The last part of their product portfolio in their business is the accessories and materials part. On top of those machines and their software, they’re also all too happy to sell you the materials which you’re going to need to make whatever products you’re making, be it about the ceramic mug or the clock or a t-shirt or some accessories like a printer or some writing tools and they exist along all of these lines. Emily, I would argue one of the more interesting parts about this business is the fact that they are vertically integrated in a sense that they aggregate all the different points that any craft artist would have to go through in order to create a new product. They try and make it as simple, as convenient as possible and therefore they create an ecosystem or a walled garden where artists and users can go and never have to leave, and that’s usually a whole market for a successful business.
Flippen: What I like the most about their strategy is not that they are the only place where you can get wood that works with the Cricut machine. You can go out to any store and buy plywood as long as it meets it’s, not too thick, it’s not too thin. If it’s the right size, you can go out and you can buy plywood and you can stick it in your Cricut machine and you can make whatever thing you’re planning on making in the first place. Clearly, I’m not a creative person, I’m not part of their addressable market here, since I can’t even come up with anything that you’d use wood to make. But regardless, people still choose to purchase it over Cricut. Cricut has their own Cricut wood, where you can buy alongside the machine, get it shipped to your house automatically, and you know, just from ease and simplicity, that that is going to work with your Cricut machine. So increasingly, a large part of their business is just up-selling these accessories and add-ons that you get with their base machines. It’s a really interesting business model. They call it the monetization flywheel, and I hate when businesses just throw flywheel in there to try to make it unique, but in this case, it is an ecosystem, they are pulling them in, initially selling them the Cricut machines, monetizing it further by up-selling accessories, and actually even selling that subscription on top, subscription to a library of items that you can get and participate to use on your Cricut machine. It is super interesting, and it’s a strategy that I think is unique in the space. I can’t think of a single competitor that is doing what Cricut is doing today.
El-Shimy: Absolutely. I cannot agree more. I believe you, Emily, mentioned an analogy between Cricut and Apple, and the way that you think the product is the phone, but actually, there is a lot more beyond that phone, including subscribing to all the different Apple software services that are needed to operate your phone that Apple takes a 30% cut on any apps that goes on the machine. Also, you get all these accessories. Now, they even sell you the charger for your phone. You buy a $1,300 or $1,400 phone and you still have to buy a charger on top of that. That’s a very interesting analogy there that you made. Another company that reminds me of Cricut, albeit in a completely different business would be Axon Enterprise. The reason I say that is because you think of Axon, which used to be Taser International, and I know it’s a beloved company across The Motley Fool, they create physical hardware products, including the body cams, the actual tasers, and so on, but they also have their own Cloud-centric software component like evidence.com where data is stored and archived and sorted and so on for ease of use by police departments. In a way, Cricut is not too far away from that kind of business in the sense that they do have their hardware products, in this case, that’s the machines, but also they have the subscription software to go along with that and can sell you accessories if you would like.
Flippen: I love the Axon example. You say Axon and I immediately get excited. It’s an amazing business, and it’s funny that you bring that up because I think their mission statement as a company is something like, “To protect lives.” It’s a really big, bold, broad mission statement that really hammers home what the intent and the purpose of the company is. When I look at Cricut, one of the things that I really liked out of their S-1, and admittedly, their S-1 is a little dated by this slide, so I apologize for that, but their mission statement is to help people lead creative lives. I’m usually not much one for mission statements. I’ve been a critic of bad mission statements in the past, but Brian Feroldi and Brian Stoffel, they’re converting me as I talk to them more and more. But I really liked this mission statement, “Help people live creative lives.” It applies to every aspect of their business, and actually, I think leaves a lot of room for optionality and how they can expand their business in the future. I like that it seemed direct, it seemed to have a targeted audience while still leaving opportunity for growth.
El-Shimy: There is an excellent point and I would probably try and join the two. Brian’s here to convert you into believing more in mission statements. If you remember from our discussion on Farfetch before, I mentioned on my see me checklists that I always look for the vision. What is the vision of the company? What is the vision of the founder? I’d like to see that it is ambitious. It’s actually grand in its scope, but at the same time it’s attainable. It’s not something that far in the sky talks. Help people leave creative lives. I feel it is achievable. Basically, they enable people to create things, otherwise, they could potentially make. It is just going to be a lot harder and with a lot more friction in the process, so they make it easier for people, I would say, indeed to be creative and to create new things that they otherwise may just decide not to because it’s that much inconvenient.
Flippen: Well, as much as we talked about how this is more than just a hardware play, this is a business that does more than, I believe it’s around 40% of their revenue right now coming from the sale of their machine, so the sale of their hardware. What different products are there? When we talk about Cricut machines, what are we talking about?
El-Shimy: Right. When we talk about the machines, there are three machines. Then they stir all the way from the bottom of the latter if you all have the Cricut Joy, that’s a $180 machine. It’s made effectively for hobbyists. It enables you to cut out about 50 or so different materials. It has two different tools that again are more geared toward the hobbyist, and probably one of their best highlights. The next one is the Cricut Explorer, which is their mid-tier product, and tries to offer 100 different types of materials opposed to 50, and has five-tool capabilities for cutting, writing and squaring, and so on. Then finally, you have the Cricut Maker, which is a professional grade tool that’s used for people that probably are professional in the way that they do their krafts, and so I would imagine that everybody who is selling on FC, or Amazon marketplace, or some other place where they’re making these customizable kraft products that they were probably using the Cricut Maker, which retails for approximately $400, can use a lot more materials, including wood, by the way, so that’s where they capture all different parts of the spectrum, if you will, from hobbyist to professional. But one thing I would add here though is that there are other companies that are getting into this business, including a really interesting young private company called Glowforge, and I don’t know if you’ve heard about it before, but it makes 3D printers that are actually geared toward this kind of kraft space, so one thing I would love to see Cricut does is actually get those M&A engines going, and potentially try and snap up some of those younger companies, especially company like Glowforge that is specialized in something relatively new here, which is the creation of 3D kraft products.
Flippen: Thousands of investors everywhere just cringed when you said 3D printing. Because I think a lot of us still have scars from when we all thought everybody was going to have a 3D printer in their home, and then it was really just the use cases weren’t quite there, and I will say, when reading through Cricuts S-1, I was given 3D printing vibes. These machines were a little bit smaller than a 3D printer or about the size of a regular printer themselves, so they are pretty sizable machines. They don’t have a ton of use cases if you’re not a regular hobbyist, and they’re expensive, and I just can’t help but think to myself, what is engagement? What does retention look like for these machines? Is this something that is just eventually going to be sitting in the back of somebody’s closet? What did help me feel a little bit more comfortable was that, around 63% of all the users, so everybody who had bought one of these machines in the past 90 days had used it to make at least one creative product, and 84% had used it over the last 365 days, till last year to make creative product. I’m curious about how you feel about those levels of engagement and retention numbers. Does that give you 3D printing vibes or do you feel like that’s decent?
Brian Feroldi: Well, first of all, let me disagree with you a little bit on the 3D printing vibe argument. I think that as investors we do tend to get scared by prior experiences we’ve had, and therefore we can write-off entire sectors, including 3D printing, including, I would say, renewable energy for example, there was so much optimism in the early 2000s to mid-2000s for these kind of emerging sectors that people got the low carried away and got burned obviously by investing in these kinds of companies. Now, I’m about to utter the most dangerous words on English language, which is, maybe this time we will be different. In the sense that the technology has come such a long way since then to make these things actually much more likely to succeed than not. I follow some of the developments and the renewable energy world as well as the 3D printing world. I can see some critical mass here forming, and therefore, just because the historical performance and experience has been bad doesn’t mean that it will always be so. Now, in terms of the engagement numbers for Cricut, I would say that they left me a little bit underwhelmed, but then again, I don’t know that I have a frame of reference here, so I’m comparing this to Axon, I’m pretty sure that Axon devices are used more than 63% of the time. At least I would hope so for the sake of everybody involved in law enforcement, but in this case, I can see it, especially because so much of their customer base, almost 70% are actually hobbyists. They’re not the professional kraft makers selling on that same necessarily. There’s only about 30% of the total user base. With those numbers, yeah, I would expect that there will be those machines that are bought and maybe put in the closet, or someone gives you a birthday gift, or a holiday gift, or one of those machines that you may not see much. But still, I like the fact that the numbers have been trending upwards, even though very slowly, low 60s to around mid 60s now, and I want to see this trend continuing, and frankly, I just want to see people creating even more creative things with this machine, so there’s still something to see here and follow over the next couple of quarters or so. But again, I’m not too excited about tiering a number like 63% of users engaged.
Flippen: At first when I heard those numbers, I think I was a bit skeptical. But then I’m thinking about all the consumer products that we buy and then leave inside of our closets. 63% feels like that is an item that is still sitting out on somebody’s desk a majority of the time. Which as I’ve reflected more positive numbers, does feel like a win. Especially considering those retention numbers and those engagement numbers were about the same pre-pandemic. That’s not some weird abnormal pandemic boom that we’re seeing. That’s some pretty sustained average level of engagements. I want to ask you about their subscription and their app offerings. But really quickly here, just to further clarify on the machine sales, we talked about that being around 40% of their revenue. Another large percentage of their revenue are their accessory sales, which we mentioned, which are just over 45%. Those two things make up the majority of their sales. Machines are sold both on Cricuts website and on Amazon. As well as from partners like Hobby Lobby, Michaels, Target, Walmart. They are sold in a ton of locations. I think what’s worth mentioning here, at least off the bat, is that over 60% of revenue does come from what Cricut says are their top seven retailers. Presumably Amazon plus six others. Nearly 50% of those sales did come online. It will be important, in my perspective, to have more sales shift to Cricuts branded website away from third-party retailers because that’s lower margin sales for them. But still having distribution in: Target, Walmart, Amazon, Hobby Lobby, Michaels, Joanne, that’s all great. That’s important when you’re still building up a branch.
El-Shimy: Absolutely. It’s definitely proof of concept that this is a legitimate product that’s sold in all the major retailers. I imagine also on some of the physical locations of Target and Walmart, and so on, they don’t have a lot of free space on their shelves for, do it yourself craft machines. If it becomes a choice between Cricut and some other competitor, maybe the fact that Target and Walmart are putting those Cricut machines there, tells you something about the demand from the product and the quality of the product. Another thing I wanted to also say, because you did mention that selling via third-party retailers tends to be a lower-margin business than selling directly obviously, from your own website. That’s also the case across the different breakdown of the revenue. The machines, which come out to about over 50% of the revenue, that’s about a 15% gross margin business. Compare that to the software component, which is about, I believe, a little bit over 10%?
Flippen: Yeah, something about that.
El-Shimy: Something like 10% of the revenue comes to almost 85% gross margin, maybe 85% to 90%. It’s crazy. The disparity is huge. Accessories are in the middle, I believe around 50% or so. I think it’s really in Cricut’s best interest to really grow that software component of their business, if not for anything just to really buff up those margins.
Flippen: Yeah. Talk to me a bit about the software part of their businesses’ subscription style revenue. I have a hard time conceptualizing this. This is what I initially missed when I did my first pass-through. When I heard about Cricut initially, it was really the idea that you’d have people not only paying for the machine, but a subscription to presumably access stuff like licensed content on that machine.
Flippen: You mentioned it’s around 10%. I think just over 10% of their revenue right now.
El-Shimy: Yeah, 12%.
Flippen: Do you see that being the majority of their revenue like Apple in 10 years or is it always going to stay small?
El-Shimy: That’s a really tough question. I can see a possibility for that if we assume that those machines are long lasting and people are going to continue to pay the subscription while not necessarily buying new machines. But at the same time we know that the machine side of the business is expanding and growing even a little more than the subscription side. Again, all segments in quarter-one, 2021, grew by over 100%. Now, the machine side grew slightly more than the subscription side. Everything is growing very impressively. But the first luck when you say, hey, we just doubled our subscription revenue, that’s great. But you’re also doubling your machine sales. That means that you’re not necessarily getting the subscription. Certain subscription revenue to be a bigger piece of the pie, if you will. Again, maybe we will want to see the subscription side growing. Maybe outperforming the machine side, so that we look at this company as more of a, let’s say, half-and-half hardware, software business. Right now it’s very loss sided, let’s say it’s almost 88% hardware, 12% software. We want to see that software side grow a bit more.
Flippen: The software itself I think is really interesting because when I heard subscription offering in my mind I priced it really cheaply. I know that you can buy these things. Licensed content or a card, that’s as cheap as $0.99 per print. If you’re looking to get a character that they then make agreements to license for my third-party. You can print that for personal use on a Cricut machine. But this is actually really expensive. I think it just goes to show how many, I won’t say professionals, but bigger than hobbyists, I will say, use these machines. They’re probably on the Cricut maker that $400 machine. Because the premium access for their subscription services is $120 a year. Which is a Peloton price tag in terms of subscription access. That is so interesting to me. They had 1.2 million paid subscribers when they went public. That’s the third quarter of 2020. That’s impressive. That’s people paying nearly, on average, $100 a year for the subscription access.
El-Shimy: That’s correct. Let’s keep in mind that this is a premium model. I don’t know if you’re familiar with this business called Canva. But if you are, which I believe is private. It’s an Australian company that’s private. One that has really also picked my interest, if you will. I have been waiting for that one-time deal for a while, but they haven’t done it. Canva is the solution to people like me who are creatively challenged and could not make a good design of a PowerPoint, even if our life depended on it. I use Canva, it makes it so easy to just go there. They have the design, they have the funds, they have the structure, they even suggest slides for you. You can have access to each library of photos and logos and so on, if you have a monthly subscription. Now, here we have something similar and that this is a freemium model, so any Cricut machine buyer technically has access to the Cricut software. But their ability to use some of those features is going to be limited. They don’t have access to that many images, they don’t have access to the logos, or they may have to pay a la carte for third-party licensed content. You mentioned Disney characters. If you are a seller on Etsy and you want to make a Mickey Mouse T-shirt, you can’t just go to Google and print out a Mickey Mouse photo from there and put it on a T-shirt because that would be copyright infringement. You actually have to pay for that.
Cricut makes it so easy to purchase that license content through their software. If you are a subscriber, then you have access to more and more of that stuff for reduced prices, mostly for free. All you have to pay is $96 a year, and that’s not too exact a thing, let’s put it that way. They also have a more premium product which is called Cricut Access Premium that offers additional discounts on content as well as preferred shipping, and I believe also discounts on materials and accessories, if you are to go that out, and that’s also only about $120 a year. It’s a reasonable amount of money to charge. I believe they may have room to actually increase those prices on the subscription down the road. Right now, I think they are more interested in converting as many users as possible into the paid subscription component. Again, I want to see some of those conversion numbers being detailed a bit more clearly in their next earnings release to gain a little more confidence in the company in its execution and the ability to transition the user base into a paid subscriber one.
Flippen: That’s critical. I see their subscription average revenue per user, the ARPU for their subscription services has risen from just around $23 in 2018 to over $32 in 2020, so definitely some room to expand there. I was getting a chuckle of how you’re laughing, Yasser, because as we’re chatting, Joey Solitro, an analyst here at The Motley Fool, pinged me. He was the initial one who brought Cricut to my attention, all the way back pre-IPO, and I definitely scoffed at it, but he told me to mention how Peloton asked this business in terms of their expensive machine upfront and their service added to it. Again, I’m not quite sold on just how big the target market is for this business in comparison to Apple or Peloton, but it definitely takes a similar approach. Then it brings me to you some comments I wanted to make about their go-to-market strategy. You mentioned off the top of the show that this is a profitable business, and that within itself is impressive. I think part of the reason why it’s so profitable is because it’s so word-of-mouth based. Over 90% of users make products that they give to friends or family, and 42% of new users came from word-of-mouth acquisitions. That’s free users for this business. So they’re not having to expel so much money to just acquire people onto their platform, onto their machines. I think expanding more users is definitely a critical aspect of that value proposition for growth, and that should be increasingly easy, considering the fact that these products are so widespread.
El-Shimy: Absolutely. One of the things that really matter to me as an investor are two metrics here, customer acquisition costs as well as customer lifetime value. I think when you have 42% of new users coming through family and friend referrals, that’s fantastic because that means you don’t have to spend a penny advertising to these new users in order to acquire them, so that really brings down your customer acquisition costs and should ideally, hopefully also improve your customer lifetime value over time. Again, I would like to see a little more granular numbers as to how these users are evolving over time. Are they starting out always with the free software and then gradually shifting? How much are they spending, what’s the average? I guess we do have the ARPU for the materials and accessories, but I’d love to also track the trends overtime for that. They do seem like they are increasing monetization so that is good. I just want to see that validated over time, and I want to see the software again playing a larger role in the story here in order for this company to really break out.
Flippen: I will have a nitpick here.
Flippen: I think I called the inner outline a minor nitpick, but as I think more about this business, I think it’s the most critical nitpick that I got, my most critical complaint for this business, and that’s their addressable market. The more I think about how management defines their addressable market, the more skeptical I am. I think they have the market split into two different things there, their TAM, which is of course the total addressable market, but also what they call their SAM, their serviceable addressable market. The SAM is mainly targeted at people who have engaged with at least one creative product within their existing product line right now, right today. I think that it’s reasonable that it was 85 million people in the U.S. and Canada, so that to me is reasonable. Their TAM seems ridiculous to me. They define their TAM as even larger. It includes the 85 million people that are part of their SAM, as well as what they call potential creatives, which are people who have done any level of engagement with any personalized items or any creative items like buying or using them. Speaking for myself, I love buying stuff off of Etsy, but I am not the type of person who is ever going to own a Cricut machine. Those sorts of projects drive me completely up a wall, which is why I buy them instead of making them. I think there’s a large portion of people like myself who are never going to be Cricut owners, and that’s fine. I don’t want the company to spend a lot of money trying to convert me into a sudden creative person when I’m not going to be that person. I would much prefer them to narrowly target these 85 million people.
Here’s my other complaint. That’s 85 million people, 96% of Cricut’s users are women so you can immediately take that 85 million people and cut that in about half because that’s about as presumably the upsize of the female population within that group. I just think the opportunity here is much narrower than management has defined it.
El-Shimy: Yeah. If they can come up with a machine to which I can dictate what I want and it just does it for me, I’ll be a user. In terms of the creativity scale, I score very low on that. In fact, I have a hard time even wrapping a present so I’m definitely out of that serviceable addressable market and also not the TAM. I agree with you, Emily, here. I think that the TAM is too ambitious. I can see the SAM, the serviceable-addressable market being at around 85 million people across North America or U.S. and Canada in particular. Absolutely, when you talk about also the fact that 96% of the users are women, that’s already helping your targeted demographic or targeted population of potential customers. While it’s definitely great, then maybe there’s a great story to be told here about sense of empowerment that women have through using these products in order maybe to have some give gifts and creative things to the family members or friends or you can run a side business, but I really don’t know why that’s the case. It’s so lopsided to the point that it becomes a bit concerning for me as an investor where I want to see a targeted population that goes beyond just one demographic.
Flippen: I’ve rambled on here a lot and I think I’ve lost track of time a bit, so I apologize. Let’s quickly go through some of the finances and then touch on the key risks. The finances are impressive and I feel bad that I didn’t leave more time for us to discuss them because as we’ve mentioned at the top of the show, this is an impressive company, it’s a profitable company. Growth has accelerated into 2020. I believe their revenue was up 97% during the year. You’ve mentioned here, Yasser outlined that, net income doubled year-over-year. This is a business that is reaching some level of scale. I think what stood out to me the most is that they’re doing a great job of controlling expenses, even in the midst of scale. Not only are they profitable, but their R&D expenses, their sales expenses, SG&A. All of those things have declined as a percentage of revenue even as the business has grown. It’s not just that net income doubled because revenue doubled. It’s that, net income doubled and revenue grew 97% in part because they’re showing some sort of operating scale. I love seeing that in a business and it’s, perhaps, what stood out to me most when looking at their financial performance.
El-Shimy: Absolutely. Oh, my God, if you look at their profitability metrics and the ratios, unbelievable. I mean, they have taken their return on total capital from 22% in 2019 all the way up to 62% [laughs] by the end of 2020. Return on equity increased from 39% […] to 88% in 2020. It’s a similar story, return on assets has more than doubled, gross margins are increasing, SG&A, you talked about that is doing well, it’s profitable on an EBIT basis. They don’t need to use those adjusted metrics in order to justify what they’re doing. They are actually profitable. They’re doing a good job in staying profitable, even while scaling a great deal and growing in the triple digits. Now, I don’t know, maybe we want to bring this up now or leave it to the risk section. But part of the question here is, when you have this kind of growth, is it repeatable, is it sustainable? Now, there’s definitely the whole argument out there that, we just went through a pandemic here, everybody was under lockdown. This may have tempted people to buy a lot of these machines and to try and start selling products on Etsy and other platforms or just practice their hobby from home. Is that something that Cricut can sustain into the future? Well, we don’t know? I mean, all that we know is that, their first quarter results for 2021 when some of those lockdown measures have been lifted seem to be very strong. Again, we will have to wait and see, but we don’t have a reason to be overly pessimistic at this point.
Flippen: That’s a fair enough point to make. I’ll quickly add in terms of what I perceive as the biggest risks, it’s not financial at all. I think you’ll need to look at their ARPU, I just love saying ARPU. But the average revenue per user, especially for their subscription services, I think, that’s going to be critical for them to continue to expand over time, again, to make that revenue repeatable. But actually, I think the biggest risk to me is actually their ownership structure. One of the things that we didn’t mention that I think just stands out to me as a critical risk is the fact that, a P/E firm, […] Trust owns more than 50% of the shares outstanding, controls the majority of the voting power for this business, and they haven’t really sold out as a result of the IPO, at least, not any of their controlling stake, and that concerns me a bit. Because what they did in September 2020 just before this business went public was, they forced the company to issue a special dividend rate and they’ve paid themselves a pretty penny. It makes it a little less agreed just when you do have a profitable business that is generating a lot of cash, but the fact that they didn’t sell out of their position, instead, issued dividends makes me a little bit concerned about, OK, well, are we going to be doing this in the future? Management doesn’t plan on it, but I just hate having that concentrated voting control with somebody who isn’t an executive or an owner of the company itself.
El-Shimy: I will even one up you on this and say, I hate these concentrated controls even with founders and CEOs when they have an outsize share of the vote in the company and have an effective way to power on everything. I think that we served very valid points that you bring up Emily and it’s definitely something that investors should begin too when they assess the risk tolerance for a company like this. I would say, however, that it’s entirely possible that the private equity firm wanted to pay a holiday for itself before the company goes public. Because they know that once a company goes public, it might be that much more difficult to get away with these kinds of things without punishing the stock. Maybe, they wanted a pay day. Again, something to look out for and that’s definitely should be on everyone’s mind.
Flippen: Oh, I love that. I know we didn’t get the chance to get to all of the wonderful notes yet prepared for today’s show. This is a business that you’ve done a lot of extensive research on, but I hope we can continue to follow it. Maybe, we can follow up with an episode in the future and some updates on Cricut. Maybe, if we’re ever shareholders at one point, we can make that follow-up episode. But until then, thank you so much for coming on and sharing your insights.
El-Shimy: I love being here, Emily, thank you for inviting me.
Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out to say “Hey,” shoot us an email at [email protected] or tweet at us, @industryfocus. If you say that and you think that I’m just joking, I’m not joking. I want to give a special shout-out to Thane from Mesa, Arizona, who reached out to us last week just to say “Hey.” Hey, Thane, we do check our emails. Thank you for the nice comments. Any Fools want to reach out to us? You can always reach us at that email address. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don’t buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the screen today. For Yasser El-Shimy, I’m Emily Flippen. Thanks for listening and Fool on.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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