Purple Innovations (NASDAQ:PRPL) is one of this year’s most surprising winners as a result of the pandemic. The tech-focused bedding company had languished in obscurity in recent years, however, management seized the opportunity. With people staying at home, the firm has enjoyed a huge tailwind as folks upgrade their bedding. This has allowed Purple stock to as much as quintuple off its March lows.
Purple has had a fascinating corporate history. The company originally launched with a heavy emphasis on direct-to-consumer sales using digital channels. It’s in the company’s branding as well, declaring itself to be the world’s first “comfort tech” company.
However, in 2019, Purple started moving toward a broader omnichannel model. It started to open many of its store locations, along with partnerships with furniture stores such as Raymour & Flanigan. The pandemic brought those plans to a halt, and Purple’s stock plunged. Some traders even feared that the company might have to restructure. As of the March quarter, Purple had just $26 million in cash against nearly $70 million in short-term liabilities, exposing some real tension on the balance sheet.
However, Purple quickly turned back to its direct-to-consumer business. In doing so, it hit the jackpot. Purple’s shares have skyrocketed and hit fresh all-time highs this week. Now, the question is if the good times will last.
Why Purple Is Succeeding
Purple has several things going for it. For one, it has its patented Purple Grid technology, which allows it to make persuasive claims about the quality and comfort of its products. It also sells much more than just mattresses; Purple created new categories such as smart pillows and pet bedding to enhance the comfort experience beyond the mattress. Purple also has built an attractive financing program to make it easier for consumers to get started.
Another key element of Purple’s success is its Made in America trait. The company is based out of Utah, and proudly produces its goods in the United States.
With the recent sales momentum, it is expanding its facilities in the state of Georgia. Given the increasing tension in U.S.-Chinese trade relations, many consumers prefer locally-sourced goods at the moment. And Purple’s expansion is a great look right now. During a recession, Purple is generating goodwill creating new American jobs.
Not everyone is sleeping easy when it comes to Purple Innovations. In fact, short sellers have built a massive position betting against the company. As of this writing, fully 13% of Purple’s stock has been sold short.
Why are bears so excited here? For one, Purple went public via a special purpose acquisition company “SPAC” rather than a traditional IPO. The success of recent SPACs such as Virgin Galactic (NYSE:SPCE) and DraftKings (NASDAQ:DKNG) has reinvigorated the idea of SPACs. Up until 2020, however, they tended to wildly underperform the stock market as a whole. As such, investors wondered why Purple Innovations went public via a SPAC rather than a traditional initial public offering.
That skepticism seemed justified, as Purple’s numbers quickly turned south after the SPAC offering was finished. It seemed like the public had bought into a pretty mediocre company. There’s a great deal of competition in the space as well. Casper Sleep (NYSE:CSPR) has struggled since it went public. Meanwhile, Mattress Firm went bankrupt in 2019 and closed numerous stores. Arguably, there may be too much money chasing the bed market.
Finally, the run in Purple’s stock price has created some valuation concerns. At this share price, the stock is going for more than 30x forward earnings, even factoring in the current surge in sales. On top of that, a big shareholder unloaded Purple stock recently. In May, an investor group called Innohold used a secondary offering to dump more than 10 million shares of Purple at around $10 per share. This was not exactly a big vote of confidence in the company’s turnaround.
Purple Stock Verdict
In retrospect, it all seems obvious. Force people to stay at home, then mail them $1,200 checks. It’s only natural that a large number of people would decide to use this extra cash to buy mattresses. If you’re going to spend 24 hours a day at home, a bed is a most logical piece of furniture to upgrade. Purple’s other products are also in increasing demand given the current societal trends.
Purple Innovations has managed to ride this upgrade cycle to thrilling heights. Purple stock was languishing in obscurity, now it’s at its highest price since becoming a public company. The question is whether or not the company will be able to transform this windfall into a more sustainable and profitable business model going forward.
As investors, I’m not sure we have enough data just yet. This could be the stroke of good luck that launches Purple into the furniture industry’s big leagues. Or it may just look like a flash-in-the-pan blip. It’s up to management to transform this momentum into a solid foundation. With Purple’s shares at their all-time high price, however, investors should exercise caution before taking big positions at the moment.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.