Owlet is one of our highest conviction picks for 2022, as the company rebounds from its FDA issues with a workaround product, FDA progressions on the Smart Sock, and upcoming FDA approval of the new BabySat. The warrants are extremely cheap, and we have been buyers under $.60. However, the equity has gotten so cheap at this point that it has the potential for 10x returns as well.
Company Overview
Owlet is the leader in the growing babytech sector. They have a number of products out in the market now that aim to make life easier for parents of newborns, with their most popular product coming in the form of the Smart Sock, which has reached penetration of up to 20% in certain states. The Smart Sock can measure a baby's oxygen levels, heart rate, and sleep trends using its built-in pulse oximeter. If the baby's readings ever fall outside a preset zone, parents are notified through the Owlet app or a nearby base station (*this notification and the marketing of this feature is what triggered the FDA warning and subsequent suspension of sales of the product*). While this product has been removed in the US by the FDA, pending their marketing approval, Owlet has already established a workaround product, the Dream Sock, that essentially does the same thing. Additionally, they are working with the FDA to rectify the marketing of the Smart Sock, while also seeking medical device approval for other products in their pipeline.
Key Investment Points
SPACs have taken a beating over the past few months, as investor sentiment has soured on this new workaround to take companies public without the hassle of the typical IPO process. One of the unique aspects of SPACs is they allow retail investors the opportunity to invest in warrants, which we almost always to prefer to invest in over the direct equity whenever possible (they help us generate leverage by taking on minimal time risk). OWLT has warrants available, which we have been accumulating since $0.55:
- Strike Price: $11.50
- Expiration Date: 9/14/2027
- Warrant Price (1/14/21): $0.37
- Stock Price (1/14/21): $2.22
- Callable?: Once it trades for 20 consecutive days at a price of $18.50 or higher, OWLT can call them if they choose to, with a 30 day advance heads up warning... We will send out an alert if OWLT ever chooses to call their warrants back!
After a promising start post-SPAC, OWLT stock started to tank when they announced they received a formal letter from the FDA on Oct. 05 of 2021. In the letter, the FDA stated that the marketing of the company’s Smart Sock makes it a medical device requiring the FDA’s premarket clearance or approval. We find this a bit odd, as the company had been selling the product for years, has amazing reviews from parents, and is featured in numerous research studies for its benefits to newborn babies. Thankfully, OWLT already released its workaround product, the Dream Sock, in January 2022. This device is expected to function almost entirely the same as the Smart Sock did, but it uses different marketing and disclaimers to avoid getting dinged by the FDA. As new sales start to roll in through the Dream Sock, and the growth story gets back on track, we expect the stock to rebound well past it's SPAC IPO debut at $10.
Here's what OWLT had to say about the removal of the Smart Sock: "After six years on the market, four versions launched and over 1 million babies monitored, we are extremely proud of the innovation and technology Owlet has delivered. We will continue to stay focused on our mission and are cooperating with the FDA so we can continue to provide sleep monitoring products and solutions to parents and babies."
Parents have even started a petition to get the FDA to allow the product back on the market, as their have been ZERO safety issues identified by the FDA: https://www.change.org/p/fight-the-fda-keep-the-owlet-smart-sock-on-the-market-use-your-voice
Key Metrics:
P/S: ~2x fwd revenue...
Many other high growth companies that pass the "Rule of 40" trade for well past 10x fwd revenue
We do not use P/E for a high growth company like OWLT that is aiming to grow revenue and build a moat before reigning in cost and producing EBITDA..
78% CAGR on revenue through 2025
High flying tech stocks, like NET and PTON, only expect to grow at rates closer to 30-40%, despite much higher multiples!
Gross Margins above 50%
This is pretty high for a consumer product company (about the same as a LULU)
PTON is closer to 32%
The stock has fallen ~80% from where it IPO'd, despite having many of the issues that caused the drop now solved, making it a high growth stock that trades like a value stock
By 2025, the parenting TAM is supposed to grow to ~$81 billion
Owlet has estimated that in the first year of a child's life, the parents will lose 44 days of sleep and spend over $12k to care for the child
International sales only make up 7% of current sales, but OWLT just launched in Europe in 2021 (Smart Sock still available in Europe)
The company expanded into Sweden, Austria, and Germany in Q1 2021, followed by expansion in July into Switzerland
The long-term play for OWLT is as a connected ecosystem of baby tech products with the ability to then offer telehealth and other services as a SaaS offering through its current app. The upcoming generation of parents has grown up with technology like this in their lives. They are going to be much more likely to adopt a high-tech product like this for their newborn, especially when the product is designed to provide them with more sleep while keeping the newborn safe!
Several of the products in Owlet's pipeline are expected to be used medically. The Owlet BabySat (FDA approval on track for as early as 2022) is a device that could be used to monitor sick babies, and the Owlet OTC Smart Sock could be used to diagnose babies with a variety of illnesses. As approved medical devices, there is then the potential for insurance reimbursement, expanding Owlet's footprint even further. What's more, these devices are going to be constantly collecting data on babies' health, which can then be incorporated back into the connected Owlet telehealth ecosystem.
Before the FDA forced OWLT to remove its #1 product, the company was growing revenue at over 50% YoY. In fact, the company has been guiding to 78% CAGR through 2025. OWLT is still able to sell the Smart Sock in markets outside the US, where the product is starting to gain traction (especially in Europe and Asia). However, OWLT will now be transitioning most of this growth from its Smart Sock into its Dream Sock product. The market is discounting the stock as if OWLT does not have any other products on the market, but the reality is that this FDA letter is more of a speed bump than road block now that the Dream Sock is in the market.
My Favorite Links
From folks much smarter than I....
Positive Reviews of the Baby Sock
FatherCraft - Illustrates that it will taker time for Owlet to win back some people since the FDA fiasco
TheEveryMom - "We only recommend products we genuinely love"
Experienced Mommy - "This smart sock is the most innovative baby monitor currently available"
- The most important presentations for obtaining key data come directly from the companies, so it's imperative one read through 10Ks, investor presentations, etc. before deciding to invest a substantial amount
- This presentation provides an in-depth overview of product portfolio, business strategy, nature of strategic relationships, progression of R&D, and financial projections
- Bullish article written before the FDA letter was given to OWLT, causing the sick price to plummet
- Author is big on the expansion of OWLT's product offerings and creating a full babytech ecosystem that collects vital data on all of the babies and is then able to offer telehealth services in conjunction with all of their products
- OWLT prepared a response to the FDA letter, highlighting the fact that there are no safety concerns from the FDA... "the FDA asserts that the Smart Sock should be classified as a medical device in the U.S. because of the heart rate and oxygen notifications"
- Parents can continue to use Smart Socks already purchased (no recall)
- Workaround product is coming (Dream Sock)
- Amazon does not often invest in companies, much less hold them for 5+ years, so it is emboldening to see that Amazon continues to hold Owlet via its venture fund
Comments