Investors often love initial public offerings (IPOs). And why not? They're exciting, and investing in them gives you a first-mover's edge on gains.
These days, though, as retail investor interest has exploded, it's harder to find great IPOs at investable prices. By the time an IPO stock hits the markets, it's often already been bought out by institutional investors for high-wealth clients, leaving retail investors in the dust. Even worse, retail investors who want to get in early push the price up when the opening bell rings, resulting in soaring prices that often immediately deflate.
Considering how the IPO market has changed, it makes more sense today to follow a stock candidate at IPO and see if it remains, or becomes, a bargain. Oddity Tech (ODD +0.29%) is a brand-new IPO stock that rolled out with a high price tag but has since dropped 24% of its value. It's beginning to look like a bargain, and investors should take notice.
NASDAQ: ODD
Key Data Points
AI advancements in the beauty industry
Oddity uses artificial intelligence (AI) to evaluate individual customer needs in the beauty industry and recommend products accordingly. It draws data from its more than 40 million customers and over a billion data points to make accurate assessments.
It might be hard to imagine being able to match skincare effectively without being in a store, but Oddity's unique PowerMatch system is able to read a customer's skin tone from a mobile camera and recommend the right colors and formulas with greater precision than the human eye, according to the company.
That's game-changing for the beauty industry, which has until now relied on beauty consultants with color charts to accurately match colors. With Oddity's technology, customers can buy beauty products online without worries, and for the company, there's a lower risk of returns, which could otherwise take a big bite out of earnings.
Oddity also runs a social media platform that rewards influencers for creating videos and posting them on Oddity's site. This provides fresh content constantly to keep customers engaged with the Oddity brands.
Oddity currently operates under two labels: Il Makiage cosmetics and SpoiledChild skincare. It recently acquired a Boston-based biotech company, rebranding it as Oddity Labs, to create customized skincare for SpoiledChild.
Customers are engaged and online
Customers are loving Oddity's model, and the company is reporting impressive growth. It's a rare growth company that was profitable even at IPO, and revenue continues to grow fast while net income increases as well.
In the 2023 third quarter, Oddity's second as a public company, it kept up its top performance and beat its own guidance. Revenue increased 37% over last year to $94 million, and gross margin expanded from 68.1% to 70.3%. Net income rose from $2.8 million to $3.8 million. Management raised its full-year outlook across metrics, but it's expecting a slowdown in sales growth in the fourth quarter to about 24%, with a gross margin of 66%.
Oddity stands out from the competition
The beauty industry is chock-full of competition, but Oddity is filling a niche. Popular beauty brand e.l.f. Beauty is also a popular mass brand with a strong web presence, but it's missing the technology edge. Ulta Beauty operates a similar business, offering a range of brands at different prices, while Estée Lauder reaches the upscale consumer using a standard retail and digital model.
Rather than seeing all of this competition as a threat, investors should note the overall growth in a booming industry. According researchers at McKinsey, the beauty industry is a $430 billion market that's expanding at a compound annual growth rate (CAGR) of 6%. However, it's expected to move toward premium, and premium beauty is expected to grow at a CAGR of 8%.
McKinsey reports that beauty e-commerce sales grew almost four times from 2015 through 2021, increasing to 20% penetration "with significant runway ahead." Oddity is at the center of e-commerce and premium beauty, putting it squarely in the path of the most significant growth trends in its industry.
CEO Eran Holtzman explained that Oddity uses its massive data collection to determine where customer pain points are and go after those opportunities. He says that Oddity is the market leader in online beauty channels, which are still underdeveloped, and that Oddity is not only investing in the massive potential ahead for Il Makiage and SpoiledChild, but that it would release new brands to capture market share where there are white space opportunities as well.
Should you rush to buy Oddity stock?
Oddity hasn't yet caught Wall Street's attention. One month ago it wasn't covered at all, and it's now covered by seven Wall Street analysts -- four give it a buy rating, and three give it a hold. At the current price, Oddity stock trades at a forward price-to-earnings ratio of only 21, which is a downright bargain for a growth stock in its early innings.
However, I would still caution investors. It's a new stock, which is always risky because it's still unknown. Also, the lockup period ends in January, and prices often fall after the lockup period ends. But keep it on your watch list and be ready to grab shares at an opportune time.
