LIND RESEARCH
Research Note | Premium Equity Research
Taking the L
Sleep Cycle (SLEEP) today released its year-end report for 2025. The results are somewhat weaker than we expected, but the key issue is the stated plans for substantial investment in 2026, which will significantly reduce profitability.
The shares are down currently by about 30% on this news. We find that the company lacks the reputational capital in the market to undertake such an abrupt action, and the statements are puzzling.
Here is the important statement:
“We are now entering a new phase for Sleep Cycle, focused on creating long-term revenue growth. With early successes in our partnership strategy and an attractive opportunity within MedTech, we are deliberately increasing our investments to enable sustainable long-term growth.
We view 2026 as an investment-intensive year, with a focus on developing new business areas rather than maximizing short-term revenue growth. Investments include technology licensing through Powered by Sleep Cycle as well as continued development of our sleep apnea screening solution. These initiatives are intended to establish new revenue streams, but we assess that they will contribute only to a limited extent to net sales growth during 2026. Against this backdrop, we expect total net sales for the full year 2026 to be somewhat lower than the previous year…
We expect net sales growth from these initiatives to gradually accelerate from 2027 and beyond, as investments translate into commercial agreements, product launches and scalable licensing revenues. At the same time, these investments establish a solid foundation for long-term growth, higher total net sales and improved profitability over time.
The EBIT margin for the full year 2026 is expected to amount to approximately 5 percent. This is a deliberate and temporary effect of forward-looking investments and does not imply any change to our long-term profitability ambitions. Our financial targets remain unchanged, and as investments are converted into scalable revenues, we expect margins to recover to levels around 25 percent as early as 2027, supported by net sales growth and higher total net sales.”
Our view on Sleep Cycle is that they should re-evaluate their capital allocation, favoring buybacks over dividends, and that they should invest in new revenue streams, such as B2B and sleep apnea. However, what they are doing now is akin to a headfirst run into a potential wall, hoping it will move. The company's current actions do not align with our view of how a small- or microcap public company should operate.
Before the market recognizes it and sees some ROI, and before the company gains greater insight and less uncertainty, the stated investment level is a significant leap of faith. Additionally, growth is expected to be gradual from 2027 onward, meaning it will not take full effect until 2028 or 2029.
Although they state they expect 25% EBIT margins again in 2027, that is only when net sales growth and absolute net sales levels are higher (as stated). At the same time, it’s expressed that most of the growth will occur beyond 2027, with a gradual increase. This means that growth must materialize; otherwise, profitability will stagnate. The market must accept that the new revenue initiatives will materialize, and it currently does not.
What to do now?
We have sold our small position (the shares were not held in the public portfolio but elsewhere). The rationale is that the new revenue ramp-up will likely be clearly visible before the market catches on, if it ever fully materializes. 2026 will be a forgotten year, and the stock will act as it is. The biggest risk is a lowball offer from the majority owners, and maybe that was the plan all along?
On a “normalized” EBIT, the company is extremely cheap, but the issue now is to understand what is actually normalized. We do not feel we have sufficient insight to judge that. We will keep SLEEP on watch, and at some price, it is just too cheap. But for now, we are out.
Disclaimer
This analysis represents the independent views of Lind Research and is based on publicly available information believed to be reliable, but no warranty is given as to its accuracy or completeness. Nothing herein is investment advice or a recommendation. We publish openly, and companies do not influence our conclusions. Lind Research may hold positions in securities discussed.
Analyst owns shares: No.
Lind Research