What happened

Shares of The Beauty Health Company (SKIN 0.33%) dropped 15% on Wednesday after reporting its first-quarter earnings results. The maker of the HydraFacial skin treatment device posted strong growth in the first three months of 2022, but investors were disappointed with the results. The stock also got downgraded by Wall Street analysts after the report. As of the close of the market on Wednesday, May 11, the stock was down 15.3% for the day.

So what

The Beauty Health Company sells delivery systems and other components for its HydraFacial product to estheticians and consumers around the globe. It operates in 90 different countries with 20 thousand delivery systems in place around the globe. With customers and professionals using the product on a regular basis, The Beauty Health Company has a reliable revenue stream.

Woman receiving facial treatment with small, hand-held device.

Image source: Getty Images.

In Q1, Beauty Health's revenue grew 58.6% year over year to $75.4 million. This can be disaggregated into two segments: actual delivery systems and consumables. The company gets a good mix of revenue from both, with $41.6 million of revenue from delivery systems in Q1 and $33.8 million from consumables. With an operating loss of $13 million in the period, the company's business is still unprofitable; but with high gross margins of 69% and a fast-growing top line, it should get to positive operating profits and cash flow in no time.

Even though the quarter looked solid, investors were apparently disappointed and decided to sell Beauty Health's stock on the day following the report. This is likely because of the recent market volatility we are going through and because an analyst at D.A. Davidson dropped their price target on the stock from $35 to $24 a share. The stock trades at around $10 today, which is well below where Wall Street thinks it should be trading, but it is a price drop nonetheless.

Now what

Beauty Health is continually working to improve its HydraFacial product line. A few months back, it launched the HydraFacial Syndeo. The new device has all sorts of software and cloud-connected tools to help practitioners work better with patients. It is still early days, but hopefully, it can help drive growth for Beauty Health over the next few years.

As of this writing, Beauty Health stock trades at a market cap of $1.6 billion and is down 56% this year. However, with only $288 million in revenue over the past 12 months, the stock still trades at a trailing price-to-sales (P/S) ratio of 5.56, well above the market average. With the company's high margins and fast revenue growth, shareholders may end up fine over the long term. But if you're going to buy shares of Beauty Health stock, just understand that you are betting on a lot of future growth.