This is my DD on $STIC. Pet industry is growing steadily over the past few years, and booming after the coronavirus. Very good timing for @barkbox to go public, so I’m trying to figure out its proper valuation under difference scenarios.

First of all, TAM. Based on US pet products association’s 2019-2020 survey (which was published before the coronavirus), there are 63.4 mm households having 90 mm dogs in total. Total US pet industry expenditure was 75 Bn in 2019 -> 85 Bn in 2021, 100+Bn by 2025?

Basic annual expense for dogs is around $1400 on average, with $400 for food and treats, $640 for dental and vet visit, $50 for toy, etc. Richer owners probably spend more on pet health care and toys, which explains the discrepancy in the data.

Fun fact: Americans actually have more cats than dogs, and cats are also cheaper to raise.

Since we are looking at the pet industry, it’s natural to use $CHWY as a reference. It has an astonishing 50% market share for online pet supplies (>7% overall). Currently the company is valued at 47 Bn, with P/S = 7.3. Rev YoY growth is 45%, while gross margin is 25.5%.

Another interesting observation: $FRPT is valued at 6 Bn, with P/S = 20! So $CHWY is not that overvalued I guess?

Back to $STIC. The pro forma EV is 2 Bn, with 12.5% of the shares to SPAC public shareholders. Currently it’s trading around $15, essentially boosting the EV to 3 Bn. At this point, P/S is 8 (FY2021E rev = 370 mm). From this point of view, the valuation is in line with $CHWY.

However, the rev growth rate of $STIC is much higher (65%), as well as its gross margin (60%). Under current circumstances, the market usually would offer more generous valuations for such companies.

Question 1: how many pet owners can afford the current subscription model of Barkbox? If we believe households with income > 200k would drop > $300/yr on pet toys, that’s roughly 10% of the population. So, 6 mm pet owners in total.

Question 2: how does Barkbox increase the revenue per user? I really don’t see much room for toys, while the margins for food/treats are low anyway. They have 2 potential ways: high-end formula food, and pet health care (which is every player’s focus right now).

Question 3: currently the monthly retention rate sits at ~95%, can they keep it? I do have concern b/c getting new toys for my dog every single month may be too much. After a few months I might have to suspend the subscription.

Question 4: can Barkbox explore the market for other pets as well? Cats might not fancy those toys, but they do need health care services and high-end food supply!

In summary, I’m still optimistic about this company. The bull case is 3 mm active monthly users, spending $1000 annually, by 2025. In the near future (2022), I can see it with 1.5 mm users, >90% monthly retention, $300 per user annually.

In this case, the fair value for the stock would be $15 - $25. Again, I think the risk of getting $STIC at $15 is small.

My plan is to open a position (50% of my target) at $15, add more if dipping. Exit strategy: 25% each at $20, $25, $30, $50.

Thanks for reading! The biggest takeaway from my investigation, is that pet health care has huge potential. Who do you think will win?