Why the Beauty Health Company Tanked as Much as 16.3% on Tuesday

What happened

Shares of The Beauty Health Company (SKIN -1.53%) slumped as much as 16.3% on Tuesday. The maker of the HydraFacial and associated products put up better-than-expected earnings, but investors ended up selling the stock following the report. As of the market close, the stock is down 16.2% for the day.

So what

Before the market opened on Aug. 10, The Beauty Health Company released its second-quarter earnings for the three months ended in June. Net sales were up 55.7% year over year to $103.5 million, handsomely beating the $83.9 million analyst expectation. Management also raised its full-year revenue guidance by $10 million to a range of $340 million to $350 million. 

Moving further down the income statement, the company is now profitable, with $7.9 million in net income and $12.6 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) generated in the quarter. Clearly, there is strong demand out there for HydraFacial cleansing and moisturizing equipment right now. Beauty Health is also seeing strong growth from its next-generation HydraFacial product called Syndeo, which was launched in the first quarter of this year. Shipments were up 108% sequentially in Q2.

So why did Beauty Health's stock flounder today? It is unclear. Maybe Wall Street saw something in the report that it did not like. Maybe it was just broad market volatility. The stock market is unpredictable in the short run, and sometimes you have to be OK with a stock falling even though it put up strong earnings.

Now what

As of this writing, The Beauty Health Company's stock trades at a market cap of $1.93 billion. This year, it is guiding for $50 million in adjusted EBITDA, giving it a forward price-to-earnings (P/E) ratio of 38.6. This is expensive when just looking at this year's earnings. However, if the company can keep putting up impressive double-digit revenue growth while maintaining or expanding its profit margins, this P/E will come down rather quickly. If you believe this can happen, it might be smart to buy the dip in this fast-growing beauty business.