When companies first go public, they often capture an extra dose of market attention because of the possibility that investors have to get in early on a high-growth opportunity. While some initial public offerings slip under the radar and may not make much of a splash, others pique investor interest and can skyrocket rapidly. Such high-flying IPO stocks frequently plunge after the initial hype wears off, but others are worth watching for their long-term potential. 

Oddity Tech (ODD -1.12%) went public in July, and it just released its first quarterly report as a public company. It demonstrated phenomenal growth, beat guidance, and raised guidance for the rest of the year. Yet the stock fell following the earnings release.

A differentiated approach to skincare and cosmetics

Oddity operates two direct-to-consumer websites with similar models. Il Makiage sells cosmetics, and SpoiledChild sells hair and skincare products. Both use artificial intelligence and machine learning technologies to offer consumers personalized experiences and product recommendations based on their specific needs, carving out a niche in what's becoming a crowded market.

It also has a platform called Kenzza that influencers can use to upload video reviews and tutorials about products. This accomplishes the dual tasks of social media marketing to reach customers where they already are as well as creating a constant stream of new content for its sites.

It uses what it describes as its "data lake" of more than 1 billion data points to offer precise recommendations for customers -- suggestions that result in high conversion rates. Artificial intelligence also powers its research labs as they work to develop improved and targeted formulas that deliver what customers are looking for.

It also has patented "hyperspectral" capabilities that it says enable a smartphone camera to see through layers of a customer's skin and offer better skincare analysis than a human, obviating the need for customers to visit a physical store.

Driving incredible performance

Oddity came onto the public markets with high growth and the bonus of profits, and it kept those attributes in the second quarter. Revenue increased 55% year over year to $151 million, and gross profit increased 60%. Gross margin expanded by 2.4 percentage points to 70.6%. The direct-to-consumer digital model lends itself to high margins. And net income increased from $16.6 million to $30 million.

These results were better than expected, and management raised its full-year revenue guidance from $453 million to about $477 million, targeted a gross margin of 69.5% instead of 67.9%, and earnings per share of $1.14 instead of $1.06.

A huge market opportunity

There's good reason to suspect that Oddity can continue to deliver strong results for shareholders. According to McKinsey, the beauty industry is expected to grow at a compound annual rate of 6% through 2027, and premium products are expected to lead the pack, with 8% expected growth.

It describes the beauty industry as "ripe for disruption," with customers rethinking everything from the shopping experience to packaging and marketing. E-commerce sales in the segment increased by almost 300% from 2015 through 2022, but e-commerce still accounts for only 20% of total sales, lagging other categories like apparel and toys. E-commerce is also the fastest-growing beauty channel, in contrast to channels like department stores and grocery retail, and it's expected to grow at a compound annual rate of 12% through 2027.

Oddity is placed squarely in the middle of the premium e-commerce market, and it's well positioned to capitalize on its opportunities.

What could go wrong?

As Oddity scales up and captures more market share, it's likely to feel the need to create a physical store presence. Many retailers see the benefits of using an omnichannel model, and they often find that approach more necessary once they pass their early high-growth stages and reach the point where they need to seek new growth levers. Physical retail doesn't offer the same wide margins Oddity enjoys right now, so pursuing that channel could affect the company's profitability down the line. Yet sticking with a digital-only model may not work in the long term. This is not a problem now, but it's something to think about when considering the stock.

There are also many brands entering this space right now, among them the popular E.l.f. Beauty and successful Ulta Beauty. Most brands have their own direct-to-consumer sites as well in this competitive space.  

Why did the stock drop?

Oddity's stock dropped after the report despite all of the good tidings. That's not unusual for recent IPO stocks that soared early on to inflated valuations. Oddity is now down by about 5% from its first-day closing price, and at current levels, it trades at a price-to-earnings ratio of around 50. That's getting closer to a reasonable valuation. 

Oddity has incredible potential, but investors should watch how it performs over the next few quarters and wait for a better entry point before buying the stock.