Tech-Driven Strategies Spur Growth In Beauty & Wellness, Enhancing Margins And LTV

Key Takeaways

• Investing in machine learning and vision technology aims to enhance product matching, lower returns, and potentially raise revenue and profit margins.
  
• Expansion into online and direct-to-consumer channels with significant user base offers major growth potential, aligning with rising online sales trends.
  
• High investment in technology and new brands alongside a heavy digital sales focus introduces risks of high operational costs and market shifts impacting revenue.

Catalysts

Operates as a consumer tech company that builds digital-first brands for the beauty and wellness industries in the United States and internationally.

• The significant investment in technology, particularly in machine learning and vision technology, is expected to improve product matching accuracy, reduce return rates, and increase customer lifetime value (LTV), potentially boosting revenue and margins.
  
• Expanding into online and direct-to-consumer channels, where Oddity is already experiencing dominance with over 50 million unique users, provides a substantial growth opportunity, especially as online sales are expected to account for 50% of the market soon, positively impacting revenue growth.
  
• Development and launch of new brands leveraging in-house technology and first-party data are expected to capture more market share and enhance customer base, leading to increased revenue from high-margin product sales.
  
• Focus on science-backed high-efficacy products with the establishment of ODDITY LABS can differentiate Oddity in the beauty and wellness market, potentially improving product offerings and driving revenue through innovative products.
  
• The execution of a $150 million share buyback program reflects management's confidence in the company's value and financial strength, aiming to enhance shareholder value and EPS through reduced share count.

Assumptions

• Analysts are assuming Oddity Tech's revenue will grow by 19.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.7% today to 13.3% in 3 years time.
• Analysts expect earnings to reach $135.9 million (and earnings per share of $1.97) by about October 2027, up from $87.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.6x on those 2027 earnings, up from 25.9x today. This future PE is greater than the current PE for the US Personal Products industry at 25.9x.
• Analysts expect the number of shares outstanding to grow by 6.52% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.52%, as per the Simply Wall St company report.

Risks

• The ambitious pace of investment in technology and new brand development, despite generating significant profit margins and free cash flow, suggests high operational costs that could dilute net margins and earnings.
  
• Heavy reliance on the digital and direct-to-consumer sales model could expose the company to shifts in consumer online spending behavior, impacting revenue growth.
  
• The complexity and novelty of developing science-backed products through ODDITY LABS, which includes the introduction of new brands designed to serve specific consumer pain points, introduce risks related to product efficacy and market acceptance, potentially affecting long-term revenue streams.
  
• The anticipation of significant investments in Brand 3, Brand 4, and ODDITY LABS, without expecting material revenue contribution from these initiatives in the near term, indicates a considerable capital outlay that may affect net margins.
  
• While the strategic focus on online sales and direct-to-consumer platforms provides a competitive advantage, it also poses a risk of market saturation or shifts in consumer preferences away from online purchases, which could adversely affect revenue growth.

Valuation

• The analysts have a consensus price target of $51.71 for Oddity Tech based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $66.0, and the most bearish reporting a price target of just $39.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.0 billion, earnings will come to $135.9 million, and it would be trading on a PE ratio of 32.6x, assuming you use a discount rate of 7.5%.
• Given the current share price of $39.66, the analyst's price target of $51.71 is 23.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.