Billing itself as “a leading comfort technology company,” Purple Innovation (NASDAQ:PRPL) designs and manufactures pillows, cushions, mattresses and other products with its fancy “Hyper-Elastic Polymer technology.” Traders largely ignored Purple stock for years, but the share price has suddenly skyrocketed.
What exactly is going on? Purple isn’t what most folks would consider a traditional technology company. Thus, we can’t explain the Purple stock boom by simply pointing to the recent tech-sector breakout.
Perhaps there is a deeper, psychological reason for Purple stock’s stunning recent performance. Could the onset of the novel coronavirus, which battered so many businesses in 2020, actually be a boon for this fast-growing cushion creator?
A Closer Look at Purple Stock
First, feel free to grab a pillow or two, sit back and consider the dazzling price action in Purple stock. This is a stock that went nowhere fast in 2016 and 2017, only to crater in 2018.
Those were bad times for Purple stockholders as the share price plunged from the $10 region to $5.20 in 2018. And in April 3 of this year, the stock was at a 52-week low of $4.42.
The story certainly doesn’t end there, though. After bottoming out in early April, Purple stock quickly ascended. As of July 27, the share price was $20.39 and showed no signs that the bulls would relinquish control of the price action.
Is it sheer madness on the part of the trading community? I don’t doubt that traders are a bit nutty, but there’s actually a reasonable explanation for the swift move in Purple stock.
Why Purple Went Green
You’ve probably heard of some stocks being referred to as “Covid-19 trades,” but I’m going to coin a term here and now by calling Purple stock a “Covid-19 comfort trade.”
What comfort is there during a horrendous global pandemic? Not much. But at least we can order some cushions online and make ourselves feel better temporarily.
If you don’t think this presents a massive money-making opportunity, the following stat should change your perception. In the month of May, Purple’s direct-to-consumer sales increased year-over-year by a whopping 125% to around $71 million.
As CEO Joe Megibow explains, the company’s pivot to online commerce meant that May’s sales weren’t soft even if the products themselves were:
“We are experiencing robust demand for our entire product portfolio led by our differentiated mattresses, pillows, and seat cushions, especially in our direct-to-consumer channel as we have shifted resources towards capturing the recent acceleration in online spending.”
There’s Money in That Mattress
The importance of the month of May for Purple cannot be overstated. By the end of that month, over two-thirds of Purple’s wholesale partners had reopened for business. Moreover, Purple’s cash position was now up to $96.1 million, indicating an improvement of approximately 54%.
Megibow acknowledged that a successful Memorial Day weekend was a contributing factor. Yet, there’s more to this story than one solid weekend of sales.
If you’re forced to stay at home and feel awful about what’s going on in the world, an online delivery of comfort products will sound quite appealing. As a result, Purple stock might unexpectedly turn out to be the ultimate “Covid-19 comfort trade.”
As for the company itself, Purple is moving forward with expansion plans for its manufacturing business. To that end, Purple is seeking a new manufacturing facility in the Southeast U.S.
Purple has also expanded its product line as the company is now selling soft Covid-19 masks. It’s too soon to know whether those masks will be a bestseller, but I have to admit that they look pretty darn comfortable.
The Bottom Line
When times get tough, soft things like cushions and mattresses can provide comfort. Purple is capitalizing on this phenomenon in 2020 through online sales of these items, and Purple stockholders should feel perfectly comfortable holding their shares.
David Moadel has provided compelling content — and crossed the occasional line — on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.