ODDITY Tech: A newly listed name that may be a good buy even at current prices

The IPO market is still down both in the US and globally. In the US, specifically, there were only 31 IPOs in Q2, down 17% y/y. But proceeds jumped 151% y/y to $6.3 billion during the quarter, mostly due to a few large deals like Cava ($CAVA). ODDITY Tech's ($ODD) IPO was another significant deal that was completed this week. A total of $424 million was raised for both the company and investors. The stock soared 35% on its trading debut yesterday, a clear sign of very high investor demand, and is now trading at a 75% premium on the original IPO price of around $28.5 per share. Let's see why this company, backed by the second-richest person in the world, is seeing such strong investor demand.

An Odd Player In The Beauty & Wellness Market

As its name suggests, ODDITY Tech is an odd player in the beauty and wellness market. It's neither a beauty nor a wellness company, even though its main products are cosmetics. ODD takes pride in being an outsider in these industries as it comes with fresh thinking and a focus on innovation.

The company touts itself as a tech platform that leverages AI and data science to build disruptive beauty and wellness brands from scratch. They invest heavily in data science, machine learning, and computer vision to create fully digital beauty brands. In fact, 40% of their workforce consists of technologists, even though they sell beauty products.

E-commerce in beauty accounts for about 25% of total sales, compared to 30% in apparel and footwear, and around 65% in toys and games. ODD expects e-commerce sales of beauty products to account for about 50% of the total in the future, and its goal is to become the main player in this digital-first industry.

It has developed PowerMatch and SpoiledBrain, two proprietary technologies that leverage AI to help users identify the correct products, formulations, and shades, reducing the risk of incorrect selection and eliminating the need to physically try on products in-store.

So far, the company has developed from scratch two beauty and wellness brands, IL MAKIAGE and SpoiledChild. ILM was founded in 2018 and it was the fastest-growing online beauty brand in the US in 2021 according to data from Digital Commerce 360. SpoiledChild, which sells skin, hair, and wellness products, was founded in 2022 and it generated $25.9 million in sales by the end of the year, which is clearly a huge accomplishment.

ODD has collected over 1 billion unique data points from users on its sites, and it seems that it successfully leverages its data advantage to build very successful online brands.

The company has recently acquired biotech startup Revela, which brought in a team of scientists tasked with creating brand-new molecules, using artificial intelligence, which will be used for the creation of new beauty and wellness products. If history is any indication, ODD has good chances of developing another successful online brand.

Spectacular Top & Bottom Line Performance

ODDITY is in hyper-growth mode, meaning that it's rapidly gaining market share from legacy brands. In 2022, sales jumped 46% y/y to $324.5 million, and in the first quarter of 2023, growth accelerated to 83% y/y. These are impressive growth metrics, especially in the current macro environment, highlighting ODD's success in growing newly-established brands. Creating a new brand from scratch is extremely risky, and the chances of success are typically pretty low. However, it seems that Oddity is successfully utilizing its data advantage and is beating the odds.

Even more impressive is the bottom line performance, which probably confirms that the company has a true data advantage and leverages AI to scale rapidly and very efficiently. ODD is already profitable even on a non-adjusted basis, which is surprising considering the high growth rates. In 2022, its net income margin came in at 13.1%, up from 8.4% in 2021. In the first quarter of 2023, the company achieved further operating leverage as total operating expenses increased by 63% while sales jumped 83% over the same period. However, the operating margin slipped to 11.8% in Q1 from 13.1% in 2022 due to inflationary pressures that caused the production costs to increase faster than revenues during the quarter.

ODD is also already cash flow positive, which is very important from an investor standpoint. Building a brand from scratch is typically a cash-intensive activity, but ODD has managed to turn it into a cash-flowing activity from the very beginning, which is quite impressive. In 2022, it made $39 million in operating cash flow (OCF), up nearly 300% y/y, and in Q1 of 2023, OCF came in at $53 million, more than the OCF produced last year.

What About Valuation

ODDITY Tech's financials are impressive, and the company deserves to trade at a premium valuation. Assuming revenues grow 45% this year to $470 million, the company trades at a forward PS ratio of 6.1x based on the current stock price of around $50. This is already a premium multiple but as a newly listed name, the hype, excitement, and euphoria can send the stock to even higher prices in the near term.

Whether the company deserves its current valuation or not depends on its financial performance in the next few quarters. If ODD continues to deliver rapid and profitable growth, the valuation can certainly rise significantly from current levels.

What Else

ODDITY Tech is a unique company in the beauty and wellness space. It's actually a tech company that uses data science and AI to build unique products, create unique customer experiences, and grow rapidly and profitably. So far its data advantage has proved to be a tremendous competitive advantage as the company has delivered impressive growth coupled with strong cash generation. However, we can't ignore the inherent risk of building new brands from scratch. It typically takes time and money, and it is rarely a successful endeavor, but ODDITY has achieved phenomenal success in both of its first two attempts. Has it squared the circle? We'll see.

I've no positions in the stocks mentioned.

The boring Disclosures: Newsletters express the opinion of the authors. Nothing in this email is a buy or sell recommendation. I'm not a financial advisor; make your own decisions.