Artificial intelligence (AI) is one of today's buzzwords. The truth, however, is that many companies have been using AI in various forms for decades. What's going on today is that companies are going beyond traditional AI and machine learning capabilities -- which inform functions like product recommendations and delivery systems -- and using next-level AI technology.
Beauty and wellness company Oddity Tech (ODD 2.94%) is a company with high-tech AI capabilities in a niche industry that had its initial public offering (IPO) last week. Let's check it out and see if Oddity should make it into your stock portfolio.
High-tech beauty in an odd way
Oddity seems like an odd name for a beauty company, but this is its brand differentiation. The company says odd is "unconstrained" and "never fits in." The company's messaging is all about not being afraid to be who you are and not holding back. Oddity is as much a tech company as it is a beauty company.
It works through two owned brands, lL Makiage cosmetics, which it's owned since 2018, and SpoiledChild skincare, which it launched in 2021. Both of these follow a digital, direct-to-consumer (DTC) model and use the same kinds of branding and technology to sell in their respective segments. Oddity's headquarters are in New York, while its research labs are in Boston, and its technology hub is in Tel Aviv.
An AI approach to an age-old problem
Management developed its unique model to address what it recognized as a wide gap in the beauty industry. Beauty shoppers are actively engaged with beauty products and spread awareness of their favorite brands and products through social media.
At the same time, a staggering 90% of beauty products are sold offline, which makes the industry one of the most underpenetrated. That's because customers need to see how products actually look on them in real life before they commit to purchase even though they may be exposed to products primarily online. Oddity wanted to bridge that gap. It addresses it in three distinct ways, all using technology, and this has led to wild success.
It's what you know and who you know
The first leg of the model is partnering with influencers. This achieves several goals: It's a constant-content machine. That keep a highly engaged customer base on its site. And it's a major part of how the company determines the right products for customers as part of its machine learning.
Influencers interact with the Oddity platform using a program called Kenzza. They can upload videos with tutorials, advice, and more. Viewers can choose influencers who best fit what they're looking for, and the system will direct them toward similar content as well as use the data to filter matching products. Customers can buy products directly through the video system.
The company has a rewards system in place for influencers as an incentive to get them onboard and producing content for the platform.
A robotic touch
The second, and most-hyped part of the process, is the AI algorithms that can assess a shopper's beauty and skincare needs without seeing the actual person. This is where the AI surpasses human abilities, and this is the most exciting part of Oddity's model.
Oddity acquired imaging company Voyage81 in 2021. Its technology allows for hyperspectral imaging from a smartphone, which means it's capable of "mapping and analyzing skin and hair features, detecting facial blood flows, and creating melanin and hemoglobin maps from a simple smartphone camera photo." The company says this system can detect 31 wavelengths that don't appear to the human eye.
It's still a beauty company
Finally, the last leg of the system is where the labs come in. Oddity still produces beauty products, and it uses biotech to create the products that are meant to actually do the job.
It acquired biotech upstart Revela in April and rebranded it Oddity Labs. Oddity has done research revealing that many customers are disappointed in the performance of anti-aging products despite the preponderance of products on the market. To stand out from the competition, it uses a combination of AI and molecule discovery to create and refine customized skincare regimens for each customer. Oddity Labs is headed by Revela founder Dr. Evan Zhao, who started the company to harness cell technology -- already creating real change in the drug industry -- for the wellness industry.
High growth in a low-growth industry
These elements have come together to deliver spectacular growth over the past few years. According to research and consulting firm McKinsey, the beauty industry is expected to grow at a rate of 6% annually through 2027. Oddity says this is a $600 billion market.
Oddity grew lL Makiage to $250 million in digital sales in only three years, and it was the fastest-growing DTC beauty company in the U.S. from 2020 to 2022, according to Women's Wear Daily. SpoiledChild is growing even faster, reaching $25.9 million in sales since its debut in Feb. 2022 through the end of that year. Management attributes its success to its outsider status that makes it a disruptor in a traditional industry, and its tech focus helps it innovate in ways insiders aren't likely to consider.
It also reached net profitability in 18 months of operation. These are its margins for the past three years:
| Metric | 2022 | 2021 | 2020 |
|---|---|---|---|
| Gross margin | 67.2% | 68.8% | 70.3% |
| Net margin | 6.7% | 6.3% | 10.6% |
| Adjusted EBITDA margin | 12.2% | 12.0% | 19.1% |
Data source: Oddity security and Exchange Commission filings. EBITDA = earnings before interest, taxes, deprecation, and amortization.
In the 2023 first quarter, revenue increased 82% year over year to $165.7 million, and net income rose from $3.0 million in the prior-year period to $19.6 million.
What are the risks?
This looks like a compelling investment thesis. However, it's not without risks. This is a competitive industry with tons of players, many of which are trying to break into digital. Oddity is also exposed to any downturn in consumer spending due to a weak economy.
Then, there's the valuation: Shares are trading at over 70 times trailing-12-month earnings. That's very expensive, even for a high-growth stock that's profitable.
What often happens with IPOs for fast-growing companies is there's an initial surge of investor enthusiasm and then a pullback when the hype can no longer sustain the valuation.
I think Oddity is an exciting company that investors should keep on their watch lists, but it has too much growth already baked into the price.
