Overview
Sleep Cycle’s Q3 results confirm a business in transition. Subscription growth remains under pressure, but the company’s diversification strategy is gaining visible traction. Partner revenue surged 55% YoY and now accounts for 11% of total sales, underscoring the early success of the in-app partner promotion. Margins remain robust, and the balance sheet continues to be over-capitalized — yet the share trades as if decline is permanent.
At these valuation levels (EV/EBIT ~5.5x, cash ≈43% of LTM revenue), we see a company with solid fundamentals but a severe market perception gap. To shift sentiment and close this gap, Sleep Cycle must pair operational progress with decisive capital allocation actions.
Q3 2025 Financial Highlights
Net sales: SEK 61.5m (–6.6% YoY, –4.7% FX-adjusted)
Operating profit (EBIT): SEK 16.8m (margin 27.3% vs 31.3%)
Paying subscribers: 832k (–9% YoY)
ARPU: SEK 271 (vs. 280; FX-adjusted SEK 276)
Partner revenue: +55% YoY; ≈11% of total sales
Cash position: SEK 115m
Discussion
The quarter showed a widening gap between legacy and emerging revenue streams. Subscription revenue continues to decline modestly, reflecting both macro softness and a deliberate shift toward higher-quality, higher-ARPU users. Recent price increases of ~10% for new users will gradually lift ARPU in Q4 and beyond.
Meanwhile, partnership revenue momentum exceeded expectations. The SDK launch positions Sleep Cycle to license its proprietary sleep-analysis technology into other health and wellness ecosystems, expanding its B2B profile. These developments confirm the structural thesis: Sleep Cycle is no longer “just an app” but an emerging sleep-technology platform.
However, despite this transition, the market remains unconvinced. Sentiment is anchored in short-term subscriber trends rather than the expanding monetization base. As a result, the valuation continues to discount a permanent decline scenario—a view that is inconsistent with fundamentals.
Capital Allocation – The Missing Catalyst
Sleep Cycle’s financial position is stronger than most peers in the Nordic small-cap tech space: high margins, consistent cash generation, and a cash balance exceeding SEK 115m. Yet none of this strength is being reflected in the share price.
The key missing ingredient is capital allocation signaling.
With EV/EBIT <6x and no leverage, a buyback program of 10–15% of outstanding shares would not only be value-accretive but also send a clear message of confidence to the market.
Investors need to see management use the balance sheet proactively — not simply preserve optionality. The opportunity cost of inaction is mounting, as cash earns a limited return while the equity trades at distressed multiples.
Given the stock’s low liquidity and high insider ownership, buybacks would also improve capital efficiency and raise investor attention to the underlying value.
We view capital deployment as the most immediate lever to change sentiment. Operationally, Sleep Cycle is executing well; what’s now required is a demonstration that management recognizes the valuation anomaly and is willing to act on it.
Outlook and Valuation
Sleep Cycle remains a high-margin, asset-light platform with tangible optionality through partner advertising, SDK licensing, AI Sleep Coach, and medical screening (sleep apnea). Near-term growth will likely remain subdued, but partner and B2B contributions are set to continue to rise.
In the earnings call, management stated that they expect the sleep apnea product to become their largest segment within a few years. We anticipate significant growth beyond the traditional app subscription revenue, but it is very difficult to estimate exactly how large it could become.
Conclusion
Q3 did not reverse the subscriber trend, but it further validated Sleep Cycle’s structural pivot. The core business remains profitable and cash generative; diversification is materializing faster than expected. What’s missing is action.
We currently rate Sleep Cycle as Outperform with a SEK 40 target, and Medium confidence on an 18-month time horizon. As our target is long-term derived, we do not expect to make any material changes to the rating or target price, except for a slight trimming. At an EV/EBIT NTM <6.0x, the market prices Sleep Cycle far too conservatively, as it implies a terminal stagnation.
To shift sentiment from skepticism to confidence, management must move from optionality to execution on capital allocation—buybacks or other shareholder actions that signal conviction. Until then, the stock may remain range-bound despite clear intrinsic value.
Go here to read more research on Sleep Cycle.