Castlight Health, Inc. (NYSE: CSLT) went on the road for its IPO with a prospectus offering 11.1 million shares of common stock at a price range of $13 to $15/share. The deal priced above the range at $16/share, raising about $177.6 million before expenses and commissions. It closed at $39.80/share, for a 148.75% pop.
Castlight’s common stock is divided between:
- Class A – held by insiders and has stronger voting power than Class B
- Class B – offered to the public
Let’s value the Class A and B the same, without even trying to calculate the increase in the price per share of the Class A to account for the voting disparity or for any liquidity discount (since it is not the listed security). This means that:
- Castlight went public at a market cap of almost $1.4 billion
- Castlight has a current market cap of almost $3.45 billion
A tech company in the healthcare software space. Throw in a nod to “cloud computing” and “Big Data,” and a multi-billion dollar market cap makes sense, right?
Let’s be realistic for a minute. Castlight was founded in 2008. The high points:
- In its latest and fifth year, it generated $13.0 million in revenue
- It lost $62.2 million dollars last year
Castlight says it has “more than 95 customers,” 24 of which are Fortune 500 companies. Fine. Let’s assume it had all of those customers in 2013. That comes to less than $150,000 per customer per year. In that light, it took $33.7 million dollars in sales and marketing to generate $13.0 million in revenues. If they got the entire Fortune 500, they would have revenue of $75.0 million per year before taking expenses into account. Does that justify its valuation?
Not fair, you say. Many of those customers could have shown up late in the year and are not fully reflected in the financials. Okay. Let’s look at an earlier filing that included an interim period. It appears that approximately $5.1 million in revenue was recognized in Q4 of 2013. Let’s give them the benefit of that doubt and annualize Q4, that would be $20.4 million in revenue and a whopping loss of $41.8 million without assuming additional sales and marketing expenses to attract the additional revenue.
Using a quick and dirty stock screener for other companies with a similar market cap, we find Cepheid, which trades on Nasdaq and has a market cap of about $3.74 billion, just north of Castlight’s market cap. Like Castlight, it also has losses. Unlike Castlight, Cepheid has over $400 million in annual revenue! And its losses are smaller than Castlight’s losses!
We haven’t even begun dissecting its business plan yet, which is a subject for our research clients.
I’m sure Castlight is a fine company with fine people involved. But how on earth is this company worth over $3 billion?
CSLT reaches Higher Ground.