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Think of Fevertree and Purplebricks when you look at new IPO, Eve Sleep
Thursday 18 May 2017 Author: Daniel Coatsworth

Investors looking for the ‘next big thing’ may want to take a closer look at Eve Sleep (EVE:AIM), which joins the stock market today (18 May).

You may think its £140m market valuation is completely unjustified for a loss making business. However, many investors were also quick to dismiss Fevertree (FEVR:AIM) and Purplebricks (PURP:AIM) when they joined the stock market for having unrealistic growth ambitions – and just look at them now.

Fevertree is up 1,139% since floating on the stock market in November 2014; and Purplebricks has risen by 253% since its IPO (initial public offering) in December 2015. I can see some similarities between these two stocks and Eve Sleep in terms of growth potential.

All about the growth

I thought Fevertree looked dull when it joined the stock market as a supplier of tonic water and ginger ale. Yet its sales have consistently grown since joining AIM and I’ve lost count for how many times it has said that trading is ahead of market expectations.

Purplebricks saw its share price struggle in its early days as a listed company as many people said its shares were overvalued. What sceptics failed to recognise was the rapid growth potential in the business – which has since become very clear.

Eve Sleep is an online retailer of mattresses, pillows, sheets and duvets, offering a 100 day free trial and 10 year guarantee for mattresses. It is one of several online players in its market disrupting an industry populated for decades by retailers with physical stores.

Fevertree has thrived thanks to customers regarding its products as being high quality, thereby differentiating itself from the more generic competition.

Purplebricks is not unique in offering an online platform to buy and sell a house. However, it certainly has a first mover advantage in terms of disrupting the marketplace and having invested a substantial amount of money in marketing to drive brand awareness.

Eve Sleep looks like a blend of both these situations. A glance at various online reviews would suggest that customers like the quality of its products. It has also made quite an impression on the market in terms of brand awareness, given the business is less than three years old.

Cashed up and ready to go

The £35m raised alongside its IPO provides decent firepower to fund a greater level of marketing. The company claims the European market opportunity for mattresses is worth £5bn. I’d imagine it would need to raise even more money next year to throw at marketing in order to sustain momentum with growing brand awareness.

Venture capital investor Octopus invested three times in the business before it joined the stock market. ‘We knew the team were unusually talented entrepreneurs who would dare to go big and create change, and that’s exactly what they have done,’ says Luke Hakes, investment director at Octopus Ventures.

Eve Sleep saw revenue jump from £2.6m in 2015 to £12m in 2016. Losses at the adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) level moved from £1.5m to £11.3m in the same time period.

Investors are being asked to pay nearly nine times the most recent year’s sales, if you exclude the new cash. That may not be too excessive if 2017’s sales are significantly higher than 2016’s. Purplebricks was valued at approximately 12 times forecast sales for the financial year when it floated, excluding cash raised at IPO. (DC)

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