Allbirds and Warby Parker get the Silicon Valley stock premium, but without the technology

Published Fri, Nov 5 20213:08 PM EDT

Allbirds , a shoe company, held its stock market debut on Wednesday and is trading at 15 times annualized revenue. Warby Parker , which makes eyeglasses, went public in September and trades for about 12 times sales. Neither are tech companies. But don't tell that to investors, who are showing their willingness to pay Silicon Valley premiums. Allbirds and Warby Parker represent the type of direct-to-consumer brands that venture capital firms have grown to love over the past decade. They've built big and dedicated online fanbases coupled with slick web and mobile-buying experiences that make them look just techy enough to attract the kind of valuations typically reserved for software businesses. Headquartered in San Francisco, Allbirds says in its prospectus that it delivers to customers through a "low-carbon, technology-enabled, consumer-focused supply chain." Warby Parker, which is based in New York, says it "operates at the intersection of design, technology, healthcare, and social enterprise." They built their brands online, but increasingly they're counting on physical stores to reach a broader universe of consumers. Allbirds has 27 stores, which currently account for 11% of revenue, and the company says, "we expect to significantly increase the total number of stores we operate over the next few years." Warby Parker already gets half its revenue from its 145-plus retail locations, with the other half coming through e-commerce. There's one way they do look like high-growth tech companies: they're losing money. Due to hefty sales and marketing costs and administrative expenses, Allbirds recorded an operating loss in the first half of the year of $15 million and Warby Parker had an operating deficit of close to $6 million. In the shoe market, Nike trades for 6 times revenue and hasn't exceeded a multiple of 7.1 in the past five years, according to FactSet. Adidas has a price-to-sales ratio of 2.6, which is well above its five-year average. Crocs' multiple is hovering just over 5. When looking at gross margins, or the profit left after accounting for the cost of goods sold, Nike and Adidas don't look much different than Allbirds, whose margin is around 51%. Nike recorded a gross margin of 48% in its latest quarter, while Adidas' came in at 52% and Crocs' was over 60%. Unlike Allbirds, those more established shoe companies aren't burning through that leftover revenue to fund headcount, real estate and marketing. Rather, they're consistently showing an operating profit. In their latest quarters, Nike reported an operating margin of 18%, Adidas topped 10%, and Crocs was sitting on a hefty 32% margin. 'Immense competition in a fragmented market' At its current stock price of $25.99, Allbirds has a market cap approaching $4 billion. David Trainer of New Constructs, a research firm that's routinely skeptical of tech IPO valuations, wrote in a report last month that to even justify a $2 billion valuation, Allbirds' revenue would have to increase by fivefold and the company would need to "become more profitable than all of its competitors." In the first half of the year, revenue increased 27% to $117.5 million. That's a healthy clip for a shoe vendor but nothing resembling rocket-ship growth in modern software, where losses are discounted because companies have to hire the smartest data scientists and build sales teams that can deliver to enterprises. "Allbirds' path to profitability is filled with immense competition in a fragmented market with low barriers to entry," Trainer wrote. "Though Allbirds attempts to differentiate itself with its direct-to-consumer (DTC) model and sustainability-focused brand, neither create a lasting competitive advantage." The picture is similar for Warby Parker, which is scheduled to report earnings for the first time as a public company next week. The only company Warby Parker names as a competitor in its prospectus is EssilorLuxottica , whose brands include Alain Mikli, Arnette, Ray-Ban and Oakley. EssilorLuxottica, a French company that came together in a $49 billion merger in 2017, trades for five times revenue, less than half of Warby Parker's multiple. Gross margins are almost identical: roughly 60% for Warby Parker and 61% for EssilorLuxottica. And while Warby Parker lost money in the second quarter after recording a narrow 2.2% operating margin in the first three months of the year, EssilorLuxottica reported an 18.5% operating margin in the first half of 2021. For Allbirds, Warby Parker and a host of other consumer brands with some tech DNA, the private markets have been particularly kind, bidding their valuations up alongside hot areas like cloud software, infrastructure and cybersecurity. The public markets tend to be more discerning. Look at mattress company Casper , which now has a market cap of under $200 million after venture investors valued it at over $1 billion . Or meal-kit provider Blue Apron , which was once valued at $2 billion by private investors and is now worth less than one-fifth of that. The bullish narrative around Allbirds and Warby Parker is that their brands are beloved and the founding teams have consistently executed in very competitive markets. But they're still not tech companies.

Allbirds IPO at the Nasdaq site, November 3, 2021.

Source: Nasdaq