In August, I concluded that Weird technology (NASDAQ:ODD) It was a little too weird for me. The company aims to revolutionize the beauty and wellness industry through the use of technology and a direct-to-consumer business model.
After an impressive growth trajectory over a fairly short period of time, growth is expected to slow as seasonal trends and uncertainty in stock-based compensation spending raise real questions.
While the company posted a solid run in the third quarter, similar questions certainly remain as shares trade near the $50 mark, making it easy for me to stay away for now.
Oddity – A strange player
Oddity aims to transform the beauty and wellness industry from several distinctive aspects and angles. Taking an outsider’s perspective, the company focuses heavily on science to create better products and provide better recommendations.
Founded in 2018, Oddity has enjoyed over 40 million users, leaving many more data points to create a huge database on which recommendations are based. The Company serves more than 4 million active customers at the time of the offering, defined as those who have ordered from the Company in the preceding twelve months.
With brands like Il Makiage and SpoiledChild, the company aimed to disrupt the multi-billion dollar beauty and health sector, with a differentiated business model.
The company went public at $35 per share in July, as shares hit the $47 mark on the first day of trading, resulting in a valuation of around $2.5 billion after taking into account account of a pro forma net cash position. This was based on a company that doubled its sales from $110 million in 2020 to $222 million in 2021, while operating profits increased from just $16 million to $19 million over the of the same period.
Revenues reached $324 million in 2022, while operating profits reached $27 million, with Q1 2023 results notably looking very strong. Sales for the first quarter of this year rose 83% to $165 million, with the company reporting an operating profit of $25 million in the meantime.
Second-quarter sales rose 43% to $140 million, with results not yet reported at the time of the public offering, although adjusted EBITDA is expected to improve from $28 million in the first quarter to $34 million. Extrapolation meant that sales trended toward $560 million, which corresponded to a >4x sales multiple and a 25x operating profit multiple, although the volatility of business results was evident.
The question focused on slowing growth and uncertainty over how stock-based compensation spending will evolve, which led me to take a wait-and-see approach. Over the summer, it became clear that second-quarter sales of $155 million (up 55% from a year earlier) were stronger than expected, with GAAP profit posted at 30 million dollars.
Trading at $52, the operating assets valuation of $2.8 billion was rather demanding, especially since the company projected full-year sales of $475 million to $480 million , well below the annualized sales rate for the first quarter of the year. In fact, revenue was already $317 million in the first half, indicating significant seasonality.
This was evident in the outlook for the third quarter, in which sales were between $81 million and $85 million, up only 18% to 23% from a year earlier, but also only a fraction of reported revenue. during each of the first two trimesters. Additionally, the company forecast stock-based compensation expenses of approximately $14 million for the third quarter, and still $8 million in the fourth quarter, indicating that the margin profile was highly uncertain .
Get off and recover
A $50 stock in August fell to $25 by October, followed by a rapid recovery in November and December, with shares now trading at $48 per share, virtually unchanged from this summer.
After tough times in September, the company’s chief financial officer, Lindsay Drucker Mann announcement a million dollar purchase of company stock.
Early October, Oddity Tech announcement that it expected third-quarter sales to increase by 29-31%, with EBITDA margins therefore also being somewhat stronger. In early November, it became clear that third quarter sales pink up 37% to $94.5 million, growing twice as fast as initially expected. GAAP operating profits of $6.3 million showed real profits, but much lower margins than those seen in the first half.
Following stronger results, the company raised its guidance for the full year. The company now has revenue of approximately $495 million and EBITDA at a midpoint of $104.5 million. This implies revenue guidance of $82 million to $85 million for the final quarter of the year, with EBITDA of approximately $13 million to $14 million, up from $20 million in the third quarter. That’s not entirely fair either, as stock-based compensation expenses are expected to fall from $12 million in the third quarter to $8 million in the fourth quarter.
The diluted share count of 61 million has pushed the stock valuation to levels of around $3 billion, near the $50 mark here. This includes a net cash position of $164 million, implying that the company trades at 5-6 times its sales and a rather demanding earnings multiple.
One last word
Even though the decline in September and October was an excellent entry point (in hindsight), I remain cautious. Even though the company posted significantly better results in the third quarter, on very low expectations, sales and profitability remain very modest.
Of course, the company may be taking a cautious stance, which happens more often outside of the IPO, but shares still look a little shaky. After all, earnings power, after deducting stock-based compensation expense, is relatively modest in the third and fourth quarters, dispelling the same doubts I had last summer (when shares were trading at similar levels).
All of this makes me a little cautious here, as I don’t feel the need to get involved yet, but I’m looking forward to the forecast for 2024, especially if seasonal trends repeat themselves.