What happened
Shares of Oddity Tech (ODD -0.69%) stock dropped 32% in September according to data provided by S&P Global Market Intelligence. Despite excellent results in its first report as a public company, investors are worried about whether or not it can keep it up, and short interest has been building.
So what
Oddity is an artificial intelligence-based cosmetics and skin care company that sells products through its consumer-facing websites and mobile apps. It has been demonstrating high-double-digit growth rates and has the advantageous feature of already being net profitable.
The company claims to have proprietary digital technology that can assess individual skin care needs from a phone camera even better than a human eye. It also recently completed a buyout of a Revela, a Boston-based biotech company, rebranding it as Oddity Labs.
Another differentiating factor is its social media platform, which leverages influencer partnerships to bring constant fresh content to its websites while offering influencers affiliate income.
In the second quarter of 2023, Oddity's first as a public company, sales increased 55% year over year. Net income almost doubled from $16.6 million last year to $30 million this year, with a 19.8% margin.
Management recently released updated preliminary numbers from the third quarter beating previous expectations.
| Metric | Preliminary Expectations (Low End) | Preliminary Expectations (High End) | Prior Initial Guidance (Midpoint) |
|---|---|---|---|
| Net revenue growth | 29% | 31% | 20.5% |
| Gross margin | 68.5% | 68.5% | 67.5% |
| Adjusted EBITDA margin | 21% | 21.5% | 20.8% |
Data source: Oddity Tech press releases. EBITDA = earnings before interest, taxes, depreciation, and amortization. All numbers are year over year.
After the announcement, Oddity stock gained back some of its losses.
Now what
Initial public offering (IPO) companies often surge and then fall, and that's what appears to be happening to Oddity. Buying in at IPO gives investors the best chance to maximize gains, but prices often soar based on hype and then begin to come down to reality.
IPO stocks also become great targets for short-sellers, who aim to benefit from this typical course of events. Short interest began to build right away and then accelerated as the stock price started to decline. It's now leveling off.
ODD Short Interest data by YCharts
At the current price, Oddity stock trades at 25 times trailing-12-month earnings. That's very reasonable for a high-growth stock. Oddity is now a profitable, high-growth stock trading at an excellent entry price. However, it's still risky. Partially because all new stocks are risky, since there are still unknowns, and partially because it's still in its lockup period, when insiders are barred from trading. Stock prices often fall after the lockup period ends. When that happens, and another quarterly report comes around, investors can consider buying the stock.
