Cosmetic device company The Beauty Health Company (SKIN 3.62%) went public in May 2021 via a merger with a special purpose acquisition company (SPAC). Most SPAC stocks have been utter disasters, but this one is a rare exception, still trading above its initial $10 per share price.
I believe BeautyHealth checks important boxes for long-term investors -- and Wall Street generally agrees. According to TipRanks, all eight of the analysts following the stock rate it a buy, with an average price target of $22.63 per share -- more than 80% higher than where it trades now.
Meet BeautyHealth's HydraFacial platform
In 2005, BeautyHealth created a machine for performing cosmetic facial procedures using water for abrasion. This became its HydraFacial platform. The device itself has undergone several iterations, most recently with its Syndeo HydraFacial machine, which launched earlier this year.
According to the company, HydraFacial machines simultaneously "cleanse, exfoliate, extract, and hydrate" the skin, whether it's on the face, the scalp, or elsewhere. Additionally, booster and serum options are available.
The company operates using a razor-and-blades business model like Intuitive Surgical or InMode. First, it sells its HydraFacial machines. Then, it earns recurring revenue by selling the consumable products used when procedures are performed.
Data from Google Trends shows search interest for HydraFacial treatments is near an all-time high, and outpaces companies such as DiamondGlow and Dermasweep that BeautyHealth cites as its main competition.
Further evidence of its popularity is its net promoter score (NPS). Management says BeautyHealth's NPS is 44, which is quite good. However, Comparably puts HydraFacial's NPS score at an eye-popping 75, with 83% of users actively promoting the brand to friends.
With that degree of popularity, it's unsurprising that BeautyHealth is selling HydraFacial machines at an impressive pace -- more than 15,000 over the past three and a half years. And nearly 5,000 machines have been traded in for newer models. Its new Syndeo machine is performing exceptionally well. Between its launch in March and June 30, 2,265 were sold. This put BeautyHealth's total installed base at over 23,000 units.
More importantly, it appears those HydraFacial machines are getting plenty of use. In the first half of 2022, delivery-system sales were up almost 76% year over year, whereas sales of consumables were up roughly 36%. In 2021, delivery-system sales rose by 161% and consumables were up almost 84%. As you can see, "blades" aren't keeping pace with "razors" -- a small concern -- but growth is still impressive.
For perspective, BeautyHealth's consumable sales accounted for 40.5% of total net sales so far in 2022. And management hopes continued growth in this segment can drive gross margin expansion. But even if it doesn't, the company's gross margin is quite impressive at close to 70%.
SKIN Gross Profit Margin (Quarterly) data by YCharts
Why BeautyHealth stock stands out
I was initially skeptical of BeautyHealth because it is a SPAC stock. Many SPACs failed to live up to projections, are cash-burning machines, and diluted shareholders massively. But so far, none of these red flags apply here.
In December 2020, BeautyHealth forecast that 2021's net sales would be $181 million, for a whopping 57% growth rate. In fact, it generated over $260 million -- higher than its original projection for 2022. And it beat and raised guidance every quarter since going public.
If you're looking for something to ding BeautyHealth on, consider its margin for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). On that metric, it has fallen short of guidance. Management projected a 14% adjusted EBITDA margin in 2021 and 16% for 2022. In reality, its margin was 12.6% in 2021, and it was just 8.3% in the first half of 2022.
Now, one could look at its profitability from a net, operating, or adjusted perspective, and there are nuances to each. Depending on how you look at it, BeautyHealth is either slightly above or slightly below breakeven. But it's not burning cash at an outrageous rate.
Finally, management set up this SPAC better than most, which has been good for shareholders. Typically, outside investors get access to around 10% of the shares in such offerings, while insiders hold the other 90%. These insiders then dump shares when they can, which tends to depress the share price to penny-stock status. But in BeautyHealth's case, regular shareholders received 37% of the company. That's the highest proportion I've seen for a SPAC stock, and likely part of the reason why shares are still above their offering price over one year later.
Is BeautyHealth stock a buy?
Management expects BeautyHealth to double its revenue and triple its adjusted EBITDA from 2022 to 2025. Given its popularity, track record, and financials, investors should take this guidance seriously. That growth potential is why I believe BeautyHealth stock is worth watching, at the very least. It may even be worth buying for those who are looking to add something new to a diversified portfolio.
However, I plan to give BeautyHealth a little more time to prove itself. Specifically, I want the company to demonstrate operating leverage (higher profit margins) as it scales, among other things. But if it can satisfy my lingering doubts, I believe an 80% upside could be just the beginning for this growth stock.
