Short Sellers Step On Cricut, Inc

High-Flying Cricut, Inc Returns To Earth

Cricut, Inc NASDAQ: CRCT caught our attention earlier this year shortly after its IPO. The company's Q1 earnings report was a blowout and opened our eyes to what we see as the new age for crafting. Cricut, Inc provides a range of Internet-connected crafting tools for individuals and businesses that create commercial quality products. Along with the tools, Cricut, Inc operates a platform where users can connect, share ideas, acquire patterns, and buy supplies directly from the source. 

Crafting is one of the oldest hobbies in existence, a pastime shared by hundreds of millions of individuals worldwide, and now brought into the digital age. The second-quarter results underscore the long-term outlook for this stock but there is a problem. For some reason, possibly because of its high valuation and slowing growth, the short sellers were piled into the stock and sent it plummeting by 20% in the wake of the report.

Cricut, Inc Beat The Expectations But It Didn't Matter

Cricut, Inc reported a great second quarter and one that beat the analyst consensus but it didn't matter. The company reported $334.49 in net revenue for a gain of 42.1% over last year and beat the consensus by 530 basis points. It didn't matter, at least to Morgan Stanley analyst Katy Huberty, because YOY growth slowed significantly from the previous quarter and there were some other factors at play. She pointed out the $17 million in extra revenue can be attributed directly to channel inventory rebuild in the wake of last year's strong business so wasn't that impressive. She downgraded the stock to underweight and helped drive share prices lower in the pre-market action. We view channel-rebuild as a precursor to future sales.

On a segment basis, the company reported strong growth in all three of its operating segments which suggest growth will continue. The connected machines segment grew by 29% to drive a 40% increase in accessories and materials. Most impressively, the company's paid subscriptions grew by 77% to drive a 110% increase in subscription revenue.  The international segment, which we view as the company's largest growth market,  grew by 179.5% to account for 8.5% of the net. That's nearly double the 4.3% of the revenue the international segment accounted for in the last quarter.

Moving down to the margins, the news was a little next but still very good. The gross margin improved nearly 800 basis points to 39% of revenue while net income increased by 40.8%. The bad news is that net margin shrank a mild 0.1% to 14.7% of the revenue and may face further pressures later in the year. Regardless, the $0.22 in GAAP earnings beat the consensus by a nickel and set the company up to easily beat the full-year consensus estimate. At midyear, the company has reported $0.49 in earnings compared to the consensus of $0.90 for the year 

The Technical Outlook: Cricut, Inc Is Down But Not Out

Shares of Cricut, Inc fell more than 20% in the wake of the Q2 earnings report, not so much because of the results or the outlook but because of its high valuation, the higher short interest, and the high-profile downgrade from Morgan Stanley. Trading at 38X earnings with a 32% short-interest the stage was set for a big decline regardless of the Q2 results. In that light, we view this as an opportunity to buy a fundamentally sound company for those who can withstand a little risk. The price action has retreated to a technically strong support target consistent with the previous quarter's earnings report so should begin to bounce very soon, if not now. Longer-term, we see this stock benefiting from COVID-19 tailwinds that continue to blow and for share prices to regain the upper side of $32 before the end of the year.