- Ticker: OLPX.US
- Entry price: $9.11
- Target price: $21.5
- Growth potential: 136%
- Time horizon: 9 months
- Risk: Moderate
- Position size: 2%
The Company
Olaplex Holdings Inc. (OLPX) manufactures and markets shampoos and conditioners for hair treatment and care. The company sells its products directly to professional hairdressers, retailers and consumers. Olaplex was founded in 2014 and is headquartered in Santa Barbara, California.
What's the idea?
- One of the attractions of the consumer sector is its high degree of resilience in the face of macroeconomic turbulence.
- The global hair and skin care market growth is expected to significantly outpace inflation. Olaplex is growing significantly faster than the market, indicating that the company's market share is increasing.
- As a pioneer in the professional homecare market, the company has been able to carve out a unique niche for itself and ensure long-term, sustainable growth.
- Olaplex has shown an impressive rate of revenue growth in recent years. The company also enjoys abnormally high margins, solid cash flow and a strong balance sheet.
- According to Wall Street consensus, Olaplex stock has at least double the upside potential.
Why might the stock go up?
Reason 1. Industry opportunities
According to Grand View Research, the global hair and scalp care market is valued at $80.8 billion and is expected to grow at a compound annual growth rate of 6.6% through 2028. Consumer focus on their health and the emergence of effective hair care products have led to a significant increase in the popularity of such products, which in turn has contributed to market growth.
The main sales channel for Olaplex is professional members of the beauty industry. The independent beauty salon market is expected to grow by 7.1% in 2022 and continue to expand in the future due to increased demand from male consumers. Thus, the simultaneous growth of the target market and the main sales channel will have a stimulating effect on Olaplex's financial performance.
An additional factor in the attractiveness of the consumer sector is its high degree of resilience in the face of macroeconomic turbulence, demonstrated over the years. For example, the State Street — Consumer Staples Select Sector SPDR (XLP) ETF, composed of consumer staples companies, declined 27.9% from 2008 to 2009, while the S&P 500 Index lost more than 44%.
According to Olaplex management, premium beauty products (Prestige beauty) was the only industry in the US with growing sales volumes in real terms in the last quarter.
Reason 2. Strong positioning
Olaplex has a strong market positioning. As a pioneer in the professional home hair care market, the company has been able to carve out a unique niche and secure long-term, sustainable growth. By actively working with showbiz stars such as Kim Kardashian, Jennifer Lopez, Drew Barrymore, Margot Robbie and Billy Eilish, as well as focusing on social media, Olaplex has been able to increase its overall brand awareness and build a loyal audience. In just a few years, the company has built a content library that surpasses that of other fast-growing firms. Below is a comparison of brands in terms of the number of hashtags on social media.
However, the company's positioning is based less on quality marketing and more on a unique product. Thanks to its patented formula, Olaplex products penetrate every hair strand and can repair the disulphide bonds damaged by bleaching, heat treatments, excessive straightening or harsh brushing.
The quality of Olaplex's offering is reflected in the revenue mix by sales channel. Most of the revenue comes from professional sales — 46%, while retail chains and DTC sales account for 32.4% and 21.7%, respectively. According to the company's internal survey, recommendations from a stylist are a key factor in purchasing decisions. The high loyalty of beauty industry professionals is a testament to the high quality of Olaplex products.
Financial indicators
Olaplex has seen an impressive growth rate in its financial performance in recent years. In addition, the company is characterised by abnormally high margins. The results for the past 12 months can be summarised as follows:
TTM generated revenue of $725.2 million, an increase of 21.2% over 2021. The main contributor to the growth momentum was the United States, where sales increased by 24.02% to $427.5 million.
At the end of the last reporting period, gross profit rose by 17.2%: from $481.8 million to $564.5 million. However, due to inflationary factors, gross margins fell from 80.51% to 77.84%.
Operating profit increased by 23.9%: from $334.2 million to $414.1 million. The operating margin increased from 55.85% to 57.10%.
Net profit rose by 24.8%: from $220.8 million to $275.6 million. The net profit margin was 38.00% compared to 36.90% for the year.
Management expects revenue to be in the range of $796 million to $826 million by the end of 2022, representing a 33%-38% year-on-year increase. Adjusted net income will be in the range of $363 million to $379 million versus $276 million last year.
The financial results for the first half of 2022 are as follows:
- Revenue rose 46.9% year on year, from $270.2 million to $397.1 million, with US sales up 52.2% to $241.4 million and international sales up 39.5% to $155.7 million.
- Gross profit increased by 39.0% year-on-year: from $214.1 million to $297.6 million. Gross margin decreased by 4.28 percentage points: from 79.23% to 74.95%.
- Operating profit was $228.6 million, up 53.7% year-on-year. The operating margin increased from 55.02% to 57.58%.
- Net profit rose from $94.9 million to $149.7 million. Net margin increased by 2.58 percentage points: from 35.11% to 37.69%.
At the end of the latest TTM reporting period, operating cash flow was $253.1 million compared to $200 million for the year. Free cash flow to equity increased from $198.3 million to $250.5 million.
Olaplex has a strong balance sheet with total debt of $663.7 million, cash equivalents and short-term investments of $198 million and net debt of $465.7 million, the same as EBITDA for the last 12 months.
Evaluation
Growth company at reasonable price
Olaplex trades at a premium to peers on EV/Sales multiples of 9.20x, but on profitability multiples it trades at an industry average level, reflecting its high margins: EV/EBITDA of 14.10x, P/Cash flow of 24.51x, P/E of 21.01x.
The significant undervaluation is clearly demonstrated by the forward multiples. At the current stock price and with Wall Street's consensus net income, Olaplex will already be trading at a three-fold discount to the industry average at the end of 2022.
Ratings of other investment houses
The minimum price target from investment banks, set by Piper Sandler, is $12 per share. Conversely, Evercore ISI values OLPX at $40. By consensus, the fair market value of the stock is $21.50, suggesting a potential upside of 136%.
Key risks
- Olaplex has a high concentration of revenue. The company's two largest buyers, Sephora and Beauty Systems Group, account for more than 10% of total revenue. The failure of one of the buyers could lead to a significant drop in sales and shareholder value.
- Olaplex operates in an extremely competitive market. A number of competitors have substantially greater resources, some of which operate in markets in which Olaplex has a relatively weak presence. This factor may affect the company's ability to grow organically in the long term.
How to take advantage of the idea?
- Buy shares at a price of $9.11.
- Allocate no more than 2% of your portfolio for purchase. To compile a balanced portfolio, you can use the recommendations of our analysts.
- Sell when the price reaches $21.5.